UNITED
STATES SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 FORM
10-Q
  (Mark
One)
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                FOR
      THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2008,
      ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                FOR
      THE TRANSITION PERIOD FROM _______________ TO
      _________________
 Commission
file number 1-14369
 
 AMERICAN
COMMUNITY PROPERTIES TRUST
 (Exact
name of registrant as specified in its charter)
 
 MARYLAND
                (State
      or other jurisdiction of incorporation or organization)
              52-2058165
                (I.R.S.
      Employer Identification No.)
 222
Smallwood Village Center
 St.
Charles, Maryland  20602
 (Address
of principal executive offices)(Zip Code)
 (301)
843-8600
 (Registrant's
telephone number, including area code)
 
 Not
Applicable
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yes x                                No
o
 
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “an accelerated filer and large accelerated filer” in Rule 12b-2
of the Exchange Act. (Check one):
    Large
accelerated filer oAccelerated filer oNon-accelerated
filer oSmaller reporting
company x
    Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
   Yes o No x
   As
of November 8, 2008, there were 5,229,954 Common Shares, par value $0.01 per
share, issued and outstanding
  -1-
  AMERICAN
COMMUNITY PROPERTIES TRUST
 FORM
10-Q
 SEPTEMBER
30, 2008
 TABLE OF CONTENTS
 Page
      NumberPART
      I
              FINANCIAL
      INFORMATIONItem
      1.
              Consolidated Financial StatementsConsolidated Statements of Income for the Nine Months
      Ended September 30, 2008 (Unaudited) and September 30, 2007
      (Unaudited)
              3Consolidated Statements of Income for the Three
      Months Ended September 30, 2008 (Unaudited) and September 30, 2007
      (Unaudited)
              4Consolidated Balance Sheets as of September
      30, 2008 (Unaudited) and December 31, 2007 (Audited)
              5Consolidated Statement of Changes in
      Shareholders' Equity for the Nine Months Ended September 30, 2008
      (Unaudited)
              6Consolidated Statements of Cash Flows for the Nine
      Months Ended September 30, 2008 (Unaudited) and September 30, 2007
      (Unaudited)
              7Notes to Consolidated Financial Statements
      (Unaudited)
              8Item
      2.
              Management's Discussion and Analysis of Financial
      Condition and Results of Operations for the Nine and Three Months Ended
      September 30, 2008 and 2007
              22Item
      4T.
              Controls and Procedures
              33PART
      II
              OTHER INFORMATIONItem
      1.
              Legal Proceedings
              34Item
      1A.
              Risk Factors
              34Item
      2
              Unregistered Sales of Equity Securities
      and Use of Proceeds
              34Item
      3.
              Defaults Upon Senior Securities
              34Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              34Item
      5.
              Other Information
              34Item
      6.
              Exhibits
              34Signatures
              35
 
  -2-
 Table of Contents
  
 AMERICAN
      COMMUNITY PROPERTIES TRUSTCONSOLIDATED
      STATEMENTS OF INCOMEFOR THE NINE MONTHS ENDED SEPTEMBER
    30,(In
      thousands, except per share amounts)(Unaudited)2008
              
              
              2007RevenuesRental
      property revenues
              
              $
              46,673
              
              
              $
              45,249Community
      development-land sales
              
              
              6,457
              
              
              
              8,032Homebuilding-home
      sales
              
              
              3,476
              
              
              
              6,113Management
      and other fees, substantially all from related entities
              
              
              568
              
              
              
              756Reimbursement
      of expenses related to managed entities
              
              
              1,106
              
              
              
              1,307Total
      revenues
              
              
              58,280
              
              
              
              61,457ExpensesRental
      property operating expenses
              
              
              22,291
              
              
              
              22,901Cost
      of land sales
              
              
              5,218
              
              
              
              5,930Cost
      of home sales
              
              
              2,694
              
              
              
              4,399General,
      administrative, selling and marketing
              
              
              8,969
              
              
              
              8,600Depreciation
      and amortization
              
              
              7,511
              
              
              
              7,009Expenses
      reimbursed from managed entities
              
              
              1,106
              
              
              
              1,307Total
      expenses
              
              
              47,789
              
              
              
              50,146Operating
      income
              
              
              10,491
              
              
              
              11,311Other
      income (expense)Interest
      and other income
              
              
              497
              
              
              
              1,178Equity
      in earnings from unconsolidated entities
              
              
              489
              
              
              
              2,020Interest
      expense
              
              
              (12,780
              )
              
              
              (14,037
              )Minority
      interest in consolidated entities
              
              
              (1,691
              )
              
              
              (1,750
              )Loss
      before provision for income taxes
              
              
              (2,994
              )
              
              
              (1,278
              )Benefit
      for income taxes
              
              
              (993
              )
              
              
              (19
              )Net
      loss
              
              $
              (2,001
              )
              
              $
              (1,259
              )Loss
      per shareBasic
      and Diluted
              
              $
              (0.38
              )
              
              $
              (0.24
              )Weighted
      average shares outstandingBasic
      and Diluted
              
              
              5,215
              
              
              
              5,205Cash
      dividends per share
              
              $
              -
              
              
              $
              0.30The
      accompanying notes are an integral part of these consolidated
      statements.
 
  -3-
 Table of Contents
  
 AMERICAN
      COMMUNITY PROPERTIES TRUSTCONSOLIDATED STATEMENTS OF INCOMEFOR
      THE THREE MONTHS ENDED SEPTEMBER 30,(In
      thousands, except per share amounts)(Unaudited)2008
              
              
              2007RevenuesRental
      property revenues
              
              $
              15,736
              
              
              $
              15,417Community
      development-land sales
              
              
              460
              
              
              
              2,063Homebuilding-home
      sales
              
              
              494
              
              
              
              899Management
      and other fees, substantially all from related entities
              
              
              188
              
              
              
              250Reimbursement
      of expenses related to managed entities
              
              
              344
              
              
              
              414Total
      revenues
              
              
              17,222
              
              
              
              19,043ExpensesRental
      property operating expenses
              
              
              7,374
              
              
              
              7,787Cost
      of land sales
              
              
              493
              
              
              
              1,574Cost
      of home sales
              
              
              394
              
              
              
              583General,
      administrative, selling and marketing
              
              
              2,920
              
              
              
              3,232Depreciation
      and amortization
              
              
              2,469
              
              
              
              2,428Expenses
      reimbursed from managed entities
              
              
              344
              
              
              
              414Total
      expenses
              
              
              13,994
              
              
              
              16,018Operating
      income
              
              
              3,228
              
              
              
              3,025Other
      income (expense)Interest
      and other income
              
              
              135
              
              
              
              288Equity
      in earnings from unconsolidated entities
              
              
              158
              
              
              
              175Interest
      expense
              
              
              (4,224
              )
              
              
              (4,700
              )Minority
      interest in consolidated entities
              
              
              (370
              )
              
              
              (193
              )Loss
      before benefit for income taxes
              
              
              (1,073
              )
              
              
              (1,405
              )Benefit
      for income taxes
              
              
              (443
              )
              
              
              (307
              )Net
      loss
              
              $
              (630
              )
              
              $
              (1,098
              )Loss
      per shareBasic
      and Diluted
              
              $
              (0.12
              )
              
              $
              (0.21
              )Weighted
      average shares outstandingBasic
      and Diluted
              
              
              5,222
              
              
              
              5,207Cash
      dividends per share
              
              $
              -
              
              
              $
              0.10The
      accompanying notes are an integral part of these consolidated
      statements.
 
  -4-
 Table of Contents
   AMERICAN
      COMMUNITY PROPERTIES TRUSTCONSOLIDATED BALANCE SHEETS(In
      thousands, except share and per share amounts)As
      of September 30, 2008
                (Unaudited)
              
              
              As
      of December 31, 2007
                (Audited)ASSETSASSETS:Investments
      in real estate:Operating
      real estate, net of accumulated depreciation
              
              $
              159,631
              
              
              $
              164,352of
      $157,494 and $150,292, respectivelyLand
      and development costs
              
              
              99,652
              
              
              
              84,911Condominiums
      under construction
              
              
              1,917
              
              
              
              4,460Rental
      projects under construction or development
              
              
              3,719
              
              
              
              853Investments
      in real estate, net
              
              
              264,919
              
              
              
              254,576Cash
      and cash equivalents
              
              
              19,303
              
              
              
              24,912Restricted
      cash and escrow deposits
              
              
              20,414
              
              
              
              20,223Investments
      in unconsolidated real estate entities
              
              
              6,476
              
              
              
              6,528Receivable
      from bond proceeds
              
              
              2,162
              
              
              
              5,404Net
      accounts receivable
              
              
              1,959
              
              
              
              2,676Deferred
      tax assets
              
              
              34,778
              
              
              
              34,075Property
      and equipment, net of accumulated depreciation
              
              
              967
              
              
              
              1,045Deferred
      charges and other assets, net of amortization of$3,389
      and $2,764 respectively
              
              
              10,840
              
              
              
              11,285Total
      Assets
              
              $
              361,818
              
              
              $
              360,724LIABILITIES AND SHAREHOLDERS'
      EQUITYLIABILITIES:Non-recourse
      debt
              
              $
              277,118
              
              
              $
              279,981Recourse
      debt
              
              
              33,814
              
              
              
              25,589Accounts
      payable and accrued liabilities
              
              
              22,675
              
              
              
              24,874Deferred
      income
              
              
              3,017
              
              
              
              3,214Accrued
      current income tax liability
              
              
              14,581
              
              
              
              14,620Total
      Liabilities
              
              
              351,205
              
              
              
              348,278SHAREHOLDERS'
      EQUITY:Common
      shares, $.01 par value, 10,000,000 shares
                authorized,
      5,229,954 shares issued and outstanding
                as
      of September 30, 2008 and December 31, 2007
              
              
              52
              
              
              
              52Treasury
      stock, 67,709 shares at cost
              
              
              (376
              )
              
              
              (376
              )Additional
      paid-in capital
              
              
              17,545
              
              
              
              17,377Retained
      deficit
              
              
              (6,608
              )
              
              
              (4,607
              )Total
      Shareholders' Equity
              
              
              10,613
              
              
              
              12,446Total
      Liabilities and Shareholders' Equity
              
              $
              361,818
              
              
              $
              360,724The
      accompanying notes are an integral part of these consolidated balance
      sheets.
 
 
 
  -5-
 Table of Contents
  
 AMERICAN
      COMMUNITY PROPERTIES TRUSTCONSOLIDATED STATEMENT OF CHANGES IN
      SHAREHOLDERS' EQUITY(In
      thousands, except share amounts)Common
      Shares
              
              
              
              
              
              AdditionalPar
              
              
              Treasury
              
              
              Paid-in
              
              
              RetainedNumber
              
              
              Value
              
              
              Stock
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance
      December 31, 2007 (Audited)
              
              
              5,229,954
              
              
              $
              52
              
              
              $
              (376
              )
              
              $
              17,377
              
              
              $
              (4,607
              )
              
              $
              12,446Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,001
              )
              
              
              (2,001
              )Amortization
      of Trustee Restricted Shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              168
              
              
              
              -
              
              
              
              168Balance
      September 30, 2008 (Unaudited)
              
              
              5,229,954
              
              
              $
              52
              
              
              $
              (376
              )
              
              $
              17,545
              
              
              $
              (6,608
              )
              
              $
              10,613The
      accompanying notes are an integral part of this consolidated
      statement.
 
 
  -6-
 Table of Contents
  AMERICAN
      COMMUNITY PROPERTIES TRUSTCONSOLIDATED STATEMENTS OF CASH
    FLOWSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30,(In
      thousands)(Unaudited)2008
              
              
              2007Cash
      Flows from Operating ActivitiesNet
      loss
              
              $
              (2,001
              )
              
              $
              (1,259
              )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
      and amortization
              
              
              7,511
              
              
              
              7,009Distribution
      to minority interests in excess of basis
              
              
              1,587
              
              
              
              1,988Benefit
      for deferred income taxes
              
              
              (703
              )
              
              
              (5,019
              )Equity
      in earnings-unconsolidated entities
              
              
              (489
              )
              
              
              (2,020
              )Distribution
      of earnings from unconsolidated entities
              
              
              490
              
              
              
              521Cost
      of land sales
              
              
              5,251
              
              
              
              5,930Cost
      of home sales
              
              
              2,694
              
              
              
              4,399Stock
      based compensation expense
              
              
              91
              
              
              
              190Amortization
      of deferred loan costs
              
              
              633
              
              
              
              643Changes
      in notes and accounts receivable
              
              
              717
              
              
              
              1,806Additions
      to community development assets
              
              
              (19,992
              )
              
              
              (23,180
              )Right
      of way easement
              
              
              -
              
              
              
              2,000Homebuilding-construction
      expenditures
              
              
              (151
              )
              
              
              (547
              )Deferred
      income
              
              
              (197
              )
              
              
              (479
              )Changes
      in accounts payable, accrued liabilities
              
              
              (2,161
              )
              
              
              (1,050
              )Net
      cash used in operating activities
              
              
              (6,720
              )
              
              
              (6,968
              )Cash
      Flows from Investing ActivitiesInvestment
      in office building and apartment construction
              
              
              (2,866
              )
              
              
              (452
              )Change
      in investments - unconsolidated entities
              
              
              51
              
              
              
              1,538Change
      in restricted cash
              
              
              (191
              )
              
              
              (1,841
              )Additions
      to rental operating properties, net
              
              
              (2,561
              )
              
              
              (6,298
              )Other
      assets
              
              
              (339
              )
              
              
              (221
              )Net
      cash used in investing activities
              
              
              (5,906
              )
              
              
              (7,274
              )Cash
      Flows from Financing ActivitiesCash
      proceeds from debt financing
              
              
              6,386
              
              
              
              23,339Payment
      of debt
              
              
              (2,888
              )
              
              
              (19,678
              )County
      Bonds proceeds, net of undisbursed funds
              
              
              5,106
              
              
              
              5,301Payments
      of distributions to minority interests
              
              
              (1,587
              )
              
              
              (1,988
              )Dividends
      paid to shareholders
              
              
              -
              
              
              
              (1,548
              )Net
      cash provided by financing activities
              
              
              7,017
              
              
              
              5,426Net
      Decrease in Cash and Cash Equivalents
              
              
              (5,609
              )
              
              
              (8,816
              )Cash
      and Cash Equivalents, Beginning of Period
              
              
              24,912
              
              
              
              27,459Cash
      and Cash Equivalents, End of Period
              
              $
              19,303
              
              
              $
              18,643The
      accompanying notes are an integral part of these consolidated
      statements.
  -7-
 AMERICAN
COMMUNITY PROPERTIES TRUST
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (Unaudited)
 (1)
              ORGANIZATION
  ACPT is a self-managed holding company
that is primarily engaged in the investment of rental properties, property
management services, community development, and homebuilding.  These
operations are concentrated in the Washington, D.C. metropolitan area and Puerto
Rico and are carried out through American Rental Properties Trust ("ARPT"),
American Rental Management Company ("ARMC "), American Land Development U.S.,
Inc. ("ALD") and IGP Group Corp. ("IGP Group") and their
subsidiaries.
 ACPT is taxed as a U.S. partnership and
its taxable income flows through to its shareholders.  ACPT is subject
to Puerto Rico taxes on IGP Group’s taxable income, generating foreign tax
credits that have been passed through to ACPT’s shareholders.  A
federal tax regulation has been proposed that could eliminate the pass through
of these foreign tax credits to ACPT’s shareholders.  Comments on the
proposed regulation are currently being evaluated with the final regulation
expected to be effective for tax years beginning after the final regulation is
ultimately published in the Federal Register.  ACPT’s federal taxable
income consists of certain passive income from IGP Group, a controlled foreign
corporation, distributions from IGP Group and dividends from ACPT’s U.S.
subsidiaries.  Other than Interstate Commercial Properties (“ICP”),
which is taxed as a Puerto Rico corporation, the taxable income from the
remaining Puerto Rico operating entities passes through to IGP Group or
ALD.  Of this taxable income, only the portion of taxable income
applicable to the profits, losses or gains on the residential land sold in
Parque Escorial passes through to ALD.  ALD, ARMC, and ARPT are taxed
as U.S. corporations.  The taxable income from the U.S. apartment
properties flows through to ARPT.
 
 (2)
              BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES
  Basis
of Presentation
 The
accompanying consolidated financial statements include the accounts of American
Community Properties Trust and its majority owned subsidiaries and partnerships,
after eliminating all intercompany transactions.  All of the entities
included in the consolidated financial statements are hereinafter referred to
collectively as the "Company" or "ACPT."
 The
Company consolidates entities that are not variable interest entities as defined
by Financial Accounting Standard Board (“FASB”) Interpretation No. 46 (revised
December 2003) (“FIN 46 (R)”) in which it owns, directly or indirectly, a
majority voting interest in the entity.  In addition, the Company
consolidates entities, regardless of ownership percentage, in which the Company
serves as the general partner and the limited partners do not have substantive
kick-out rights or substantive participation rights in accordance with Emerging
Issues Task Force Issue 04-05, "Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights," (“EITF 04-05”).  The
assets of consolidated real estate partnerships not 100% owned by the Company
are generally not available to pay creditors of the Company.
 The
consolidated group includes ACPT and its four major subsidiaries, American
Rental Properties Trust, American Rental Management Company, American Land
Development U.S., Inc., and IGP Group Corp.  In addition, the
consolidated group includes the following other entities:
  Alturas
      del Senorial Associates Limited Partnership
              Land
      Development Associates S.E.American
      Housing Management Company
              LDA
      Group, LLCAmerican
      Housing Properties L.P.
              Milford
      Station I, LLCBannister
      Associates Limited Partnership
              Milford
      Station II, LLCBayamon
      Garden Associates Limited Partnership
              Monserrate
      Associates Limited PartnershipCarolina
      Associates Limited Partnership S.E.
              New
      Forest Apartments, LLCCoachman's
      Apartments, LLC
              Nottingham
      South, LLCColinas
      de San Juan Associates Limited Partnership
              Owings
      Chase, LLCCrossland
      Associates Limited Partnership
              Palmer
      Apartments Associates Limited PartnershipEscorial
      Office Building I, Inc.
              Prescott
      Square, LLCEssex
      Apartments Associates Limited Partnership
              St.
      Charles Community, LLCFox
      Chase Apartments, LLC
              San
      Anton Associates S.E.Gleneagles
      Apartments, LLC
              Sheffield
      Greens Apartments, LLCHeaden
      House Associates Limited Partnership
              Torres
      del Escorial, Inc.Huntington
      Associates Limited Partnership
              Turabo
      Limited Dividend PartnershipInterstate
      Commercial Properties, Inc.
              Valle
      del Sol Associates Limited PartnershipInterstate
      General Properties Limited Partnership, S.E.
              Village
      Lake Apartments, LLCJardines
      de Caparra Associates Limited Partnership
              Wakefield
      Terrace Associates Limited PartnershipLancaster
      Apartments Limited Partnership
              Wakefield
      Third Age Associates Limited
Partnership
 
 The Company's
investments in entities that it does not control are recorded using the equity
method of accounting.  Refer to Note 3 for further discussion
regarding Investments in Unconsolidated
Real Estate Entities.
 -8-
 Table of Contents
  Interim
Financial Reporting
 These
unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission.  Certain information and note
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted.  The Company has no items of
other comprehensive income for any of the periods presented.  In the
opinion of management, these unaudited financial statements reflect all
adjustments (which are of a normal recurring nature) necessary to present a fair
statement of results for the interim period.  While management
believes that the disclosures presented are adequate to make the information not
misleading, these financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report filed on Form 10-K for the year ended December 31, 2007.  The
operating results for the nine and three months ended September 30, 2008, and
2007, are not necessarily indicative of the results that may be expected for the
full year.  Net income (loss) per share is calculated based on
weighted average shares outstanding.
  Use
of Estimates
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements, and accompanying notes and disclosures.  These
estimates and assumptions are prepared using management's best judgment after
considering past and current events and economic conditions. Actual results
could differ from those estimates and assumptions.
 
 Sales,
Profit Recognition and Cost Capitalization
 In
accordance with Statement of Financial Accounting Standard (“SFAS”) No. 66,
“Accounting for Sales of Real Estate,” community development land sales are
recognized at closing only when sufficient down payments have been obtained and
initial and continuing investment criteria have been met, possession and other
attributes of ownership have been transferred to the buyer, and ACPT has no
significant continuing involvement.  Under the provisions of SFAS 66,
related to condominium sales, revenues and costs are to be recognized when
construction is beyond the preliminary stage, the buyer is committed to the
extent of being unable to require a refund except for non-delivery of the unit,
sufficient units in the project have been sold to ensure that the property will
not be converted to rental property, the sales proceeds are collectible and the
aggregate sales proceeds and the total cost of the project can be reasonably
estimated.  Accordingly, we recognize revenues and costs upon
settlement with the homebuyer which doesn’t occur until after we receive use and
occupancy permits for the building.
 The costs of
developing the land are allocated to our land assets and charged to cost of
sales as the related inventories are sold using the relative sales value method
which rely on estimated costs and sales values.   In accordance
with SFAS 67 "Accounting for Costs and Initial Rental Operations of Real Estate
Projects", the costs of acquiring and developing land are allocated to these
assets and charged to cost of sales as the related inventories are sold. Within
our homebuilding operations, the costs of acquiring the land and constructionof
the condominiums are allocated to these assets and charged to cost of sales as
the condominiums are sold.  The cost of sales is determined by the
percentage of completion method.  The Company considers interest
expense on all debt available for capitalization to the extent of average
qualifying assets for the period.  Interest specific to the
construction of qualifying assets, represented primarily by our recourse debt,
is first considered for capitalization.  To the extent qualifying
assets exceed debt specifically identified, a weighted average rate including
all other debt is applied.  Any excess interest is reflected as
interest expense.
 
 Impairment
of Long-Lived Assets
 ACPT carries its rental properties,
homebuilding inventory, land and development costs at the lower of cost or fair
value in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."  For real estate assets such as our rental properties which
the Company plans to hold and use, which includes property to be developed in
the future, property currently under development and real estate projects that
are completed or substantially complete, we evaluate whether the carrying amount
of each of these assets will be recovered from their undiscounted future cash
flows arising from their use and eventual disposition.  If the
carrying value were to be greater than the undiscounted future cash flows, we
would recognize an impairment loss to the extent the carrying amount is not
recoverable.  Our estimates of the undiscounted operating cash flows
expected to be generated by each asset are performed on an individual project
basis and based on a number of assumptions that are subject to economic and
market uncertainties, including, among others, demand for apartment units,
competition, changes in market rental rates, and costs to operate and complete
each project.  There have been no impairment charges for the nine and
three months ended September 30, 2008 and 2007.
 
 The
Company evaluates, on an individual project basis, whether the carrying value of
its substantially completed real estate projects, such as our homebuilding
inventory that are to be sold, will be recovered based on the fair value less
cost to sell.  If the carrying value were to be greater than the fair
value less costs to sell, we would recognize an impairment loss to the extent
the carrying amount is not recoverable.  Our estimates of the fair
value less costs to sell are based on a number of assumptions that are subject
to economic and market uncertainties, including, among others, comparable sales,
demand for commercial and residential lots and competition.  The
Company performed similar reviews for land held for future development and sale
considering such factors as the cash flows associated with future development
expenditures.  Should this evaluation indicate an impairment has
occurred, the Company will record an impairment charge equal to the excess of
the historical cost over fair value less costs to sell.  There have
been no impairment charges for the nine and three months ended September
30, 2008 and 2007.
 -9-
 Table of Contents
 Cash
and Cash Equivalents
 Cash and
cash equivalents include cash on hand, unrestricted deposits with financial
institutions and short-term investments with original maturities of three months
or less.  Restricted cash and escrow deposits include funds held in
restricted escrow accounts used for maintenance and capital improvements with
the approval of HUD and/or the State Finance Agency.  The account also
includes tenant security deposits as well as deposits collected within our
homebuilding operations as well as funds in an escrow account that are
restricted for the repayment of the County bonds.
 As of
September 30, 2008, the Company had cash and cash equivalents of $19,303,000 and
$20,414,000 in restricted cash.  Included in the Company’s cash and
cash equivalents are $8,756,000 of cash located within multifamily apartment
entities, and to which the Company does not have direct control.  Cash
flow from our consolidated apartment properties whose mortgage loans are insured
by the Federal Housing Authority ("FHA"), or financed through the housing
agencies in Maryland, Virginia or Puerto Rico (the "Financing Agencies,") are
subject to guidelines and limits established by the apartment partnerships'
regulatory agreements with HUD and the State Financing Agencies. For two of our
Puerto Rico partnerships, the regulatory agreements also require that if cash
from operations exceeds the allowable cash distributions, the surplus must be
deposited into restricted escrow accounts held by the mortgagee and controlled
by HUD or the applicable Financing Agency.
 Depreciable
Assets and Depreciation
 The
Company's operating real estate is stated at cost and includes all costs related
to acquisitions, development and construction.  The Company makes
assessments of the useful lives of our real estate assets for purposes of
determining the amount of depreciation expense to reflect on our income
statement on an annual basis.  The assessments, all of which are judgmental
determinations, are as follows:
 
 ·
                  Buildings
      and improvements are depreciated over five to forty years using the
      straight-line or double declining balance
  methods,
 ·
                  Furniture,
      fixtures and equipment are depreciated over five to seven years using the
      straight-line method,
 ·
                  Leasehold
      improvements are capitalized and depreciated over the lesser of the life
      of the lease or their estimated useful
life,
 ·
                  Maintenance
      and other repair costs are charged to operations as
    incurred.
 
 Operating
Real Estate
 The table
below presents the major classes of depreciable assets as of September 30, 2008
and December 31, 2007 (in thousands):
  September
      30,
              
              December
      31,2008
              
              2007(Unaudited)
              
              (Audited)Building
              $
              265,816
              
              $
              265,115Building
      improvements
              
              10,606
              
              
              10,414Equipment
              
              15,191
              
              
              13,603291,613
              
              
              289,132Less:Accumulated
      depreciation
              
              157,494
              
              
              150,292134,119
              
              
              138,840Land
              
              25,512
              
              
              25,512Operating
      properties, net
              $
              159,631
              
              $
              164,352
  Other
Property and Equipment
 In
addition, the Company owned other property and equipment of $967,000 and
$1,045,000, net of accumulated depreciation of $2,480,000 and $2,294,000
respectively, as of September 30, 2008 and December 31, 2007
respectively.
 
 Depreciation
 Total
depreciation expense was $7,511,000 and $7,009,000 for the nine months ended
September 30, 2008 and 2007, respectively, and $2,469,000 and $2,428,000 for the
three months ended September 30, 2008 and 2007, respectively.
 -10-
 Table of Contents
 Impact
of Recently Issued Accounting Standards
 
 SFAS
157 and 159
 In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” and in
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.”  SFAS 157 defines fair values as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in
which the reporting entity transacts.  SFAS 157 applies whenever other
standards require assets or liabilities to be measured at fair value and does
not expand the use of fair value in any new circumstances.  SFAS 157
establishes a hierarchy that prioritizes the information used in developing fair
value estimates.  The hierarchy gives the highest priority to quoted
prices in active markets and the lowest priority to unobservable data, such as
the reporting entity’s own data.  SFAS 157 requires fair value
measurements to be disclosed by level within the fair value
hierarchy.  On February 12, 2008, the FASB issued FASB Staff Position
No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which amends FAS No.
157 by delaying its effective date by one year for non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. Therefore,
beginning on January 1, 2008, this standard applies prospectively to new fair
value measurements of financial instruments and recurring fair value
measurements of non-financial assets and non-financial
liabilities.  On January 1, 2009, the standard will also apply to all
other fair value measurements.
 SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value.  The fair value election is designed to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  SFAS 159 was effective for the Company beginning January
1, 2008.  The implementation of SFAS 157 and 159 did not have a
material impact on our financial statements.
 
 SFAS
141R
 On
December 4, 2007, the FASB issued Statement No. 141R, “Business Combinations”
(“SFAS 141R”).  This statement changes the accounting for acquisitions
specifically eliminating the step acquisition model, changing the recognition of
contingent consideration from being recognized when it is probable to being
recognized at the time of acquisition, disallowing the capitalization of
transaction costs and delays when restructurings related to acquisitions can be
recognized.  The standard is effective for fiscal years ending after
December 15, 2008 and will only impact the accounting for acquisitions we make
after its adoption, except for certain amendments related to income taxes
related to acquisitions which will apply to business combinations with
acquisition dates before the effective dates of SFAS 141R.
 
 SFAS
160
 On
December 4, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 replaces the concept of minority interest with
noncontrolling interests in subsidiaries.  Noncontrolling interests
will now be reported as a component of equity in the consolidated statement of
financial position.  Earnings attributable to noncontrolling interests
will continue to be reported as a part of consolidated earnings; however, SFAS
160 requires that income attributable to both controlling and noncontrolling
interests be presented separately on the face of the consolidated income
statement.  In addition, SFAS 160 provides that when losses
attributable to noncontrolling interests exceed the noncontrolling interest’s
basis, losses continue to be attributed to the noncontrolling interest as
opposed to being absorbed by the consolidating entity.  SFAS 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests.  All other requirements of SFAS 160
shall be applied prospectively.  SFAS 160 is effective for the first
annual reporting period beginning on or after December 15, 2008.  The
Company is currently evaluating the impact of the adoption of SFAS 160 on its
consolidated financial statements.  However, the provisions of SFAS
160 are directly applicable to the Company’s currently reported minority
interest in consolidated entities and, accordingly, will change the presentation
of the Company’s financial statements when implemented.
  EITF
Issue No. 06-08
 In
November 2006, the Emerging Issues Task force of the FASB (“EITF”) reached a
consensus on EITF Issue No. 06-08, “Applicability of a Buyer’s Continuing
Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for
Sales of Condominiums” (“EITF 06-08”).  EITF 06-08 requires
condominium sales to meet the continuing investment criterion in FAS No. 66 in
order for profit to be recognized under the percentage-of-completion
method.  EITF 06-08 was effective for the Company beginning January 1,
2008.  The implementation of EITF 06-08 did not have a material impact
on our financial statements.
  -11-
 Table of Contents
 (3)
              INVESTMENT
      IN UNCONSOLIDATED REAL ESTATE
ENTITIES
 
 The
Company accounts for investments in unconsolidated real estate entities that are
not considered variable interest entities under FIN 46(R) in accordance with SOP
78-9 "Accounting for
Investments in Real Estate Ventures"and APB Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock".  For entities that are considered
variable interest entities under FIN 46(R), the Company performs an assessment
to determine the primary beneficiary of the entity as required by FIN
46(R).  The Company accounts for variable interest entities in which
the Company is not a primary beneficiary and does not bear a majority of the
risk of expected loss in accordance with the equity method of
accounting.
 The
Company considers many factors in determining whether or not an investment
should be recorded under the equity method, such as economic and ownership
interests, authority to make decisions, and contractual and substantive
participating rights of the partners.  Income and losses are
recognized in accordance with the terms of the partnership agreements and any
guarantee obligations or commitments for financial support.  The
Company's investments in unconsolidated real estate entities accounted for under
the equity method of accounting currently consists of general partnership
interests in two limited partnerships which own apartment properties in the
United States; a limited partnership interest in a limited partnership that owns
a commercial property in Puerto Rico; and a 50% ownership interest in a joint
venture formed as a limited liability company.
  Apartment
Partnerships
 The
unconsolidated apartment partnerships as of September 30, 2008 and 2007 included
Brookside Gardens Limited Partnership (“Brookside”) and Lakeside Apartments
Limited Partnership (“Lakeside”) which collectively represent 110 rental
units.  We have determined that these two entities are variable
interest entities under FIN 46(R).  However, the Company is not
required to consolidate the partnerships due to the fact that it is not the
primary beneficiary and does not bear the majority of the risk of expected
losses.  The Company holds a nominal (1% or less) economic interest in
Brookside and Lakeside but, as a general partner, we have significant influence
over operations of these entities that is disproportionate to our economic
ownership.  In accordance with SOP 78-9 and APB No. 18, these
investments are accounted for under the equity method.  The Company is
exposed to losses consisting of our net investment, loans and unpaid fees for
Brookside of $246,000 and $231,000 and for Lakeside of $160,000 and $172,000 as
of September 30, 2008 and December 31, 2007, respectively.  All
amounts are fully reserved.  Pursuant to the partnership agreement for
Brookside, the Company, as general partner, is responsible for providing
operating deficit loans to the partnership in the event that it is not able to
generate sufficient cash flows from its operating activities.
 
 Commercial
Partnerships
 The
Company holds a limited partner interest in a commercial property in Puerto Rico
that it accounts for under the equity method of accounting.  ELI, S.E.
("ELI"), is a partnership formed for the purpose of constructing a building for
lease to the State Insurance Fund of the Government of Puerto
Rico.  ACPT contributed the land in exchange for $700,000 and a 27.82%
ownership interest in the partnership's assets, equal to a 45.26% interest in
cash flow generated by the thirty-year lease of the building.
 On April
30, 2004, the Company purchased a 50% limited partnership interest in El Monte
Properties, S.E. ("El Monte") from Insular Properties Limited Partnership
("Insular") for $1,462,500.  Insular is owned by the J. Michael Wilson
Family, a related party.  In December 2004, a third party buyer
purchased El Monte for $20,000,000, $17,000,000 in cash and $3,000,000 in
notes.  The net cash proceeds from the sale of the real estate were
distributed to the partners.  As a result, the Company received
$2,500,000 in cash and recognized $986,000 of income in 2004.  The
gain on sale was reduced by the amount of the seller's note, which is subject to
future subordination.  In January 2005, El Monte distributed the notes
to the partners whereby the Company received a $1,500,000 note.  The
Company determined that the cost recovery method of accounting was appropriate
for this transaction and accordingly, deferred revenue recognition on this note
until cash payment was received.  In January 2007, the Company
received $1,707,000, equal to the full principal amount due plus all accrued
interest outstanding and, accordingly, recognized $1,500,000 of equity in
earnings from unconsolidated entities and $207,000 of interest
income.  The Company has no required funding obligations and
management expects to wind up El Monte’s affairs during 2009.
 
 Land
Development Joint Venture
 In
September 2004, the Company entered into a joint venture agreement with Lennar
Corporation for the development of a 352-unit, active adult community located in
St. Charles, Maryland.  The Company manages the project's development
for a market rate fee pursuant to a management agreement.  In
September 2004, the Company transferred land to the joint venture in exchange
for a 50% ownership interest and $4,277,000 in cash.  The Company's
investment in the joint venture was recorded at 50% of the historical cost basis
of the land with the other 50% recorded within our deferred charges and other
assets.  The proceeds received are reflected as deferred
revenue.  The deferred revenue and related deferred costs will be
recognized into income as the joint venture sells lots to Lennar.  In
March 2005, the joint venture closed a non-recourse development loan, which was
amended in June 2006, December 2006 and again in October
2007.  Included within these amendments, the maximum borrowings
outstanding on the facility were reduced to $5.0 million.  For the
October 2007 amendment, the development loan was modified to provide a one-year
delay in development of the project, as to date, lot development has outpaced
sales.  Per the terms of the loan, both the Company and Lennar
provided development completion guarantees.  In the nine and three
months ended September 30, 2008, the joint venture did not sell any
lots.  In the nine and three months ended September 30, 2007, the
joint venture sold 48 and 18 lots to Lennar and recognized $1,063,000 and
$408,000 in deferred revenue, off-site fees and management fees and $358,000 and
$140,000 of deferred costs, respectively.
 The following table summarizes the
financial data and principal activities of the unconsolidated real estate
entities, which the Company accounts for under the equity method.  The
information is presented to segregate the apartment partnerships from the
commercial partnerships as well as our 50% ownership interest in the land
development joint venture, which are all accounted for as “investments in
unconsolidated real estate entities” on the balance sheets.
 -12-
 Table of Contents
 LandDevelopmentApartment
              
              
              Commercial
              
              
              JointProperties
              
              
              Property
              
              
              Venture
              
              
              Total(in
      thousands)Summary
      Financial Position:Total
      AssetsSeptember
      30, 2008
              
              $
              4,822
              
              
              $
              27,867
              
              
              $
              12,714
              
              
              $
              45,403December
      31, 2007
              
              
              4,980
              
              
              
              27,379
              
              
              
              12,397
              
              
              
              44,756Total
      Non-Recourse DebtSeptember
      30, 2008
              
              
              3,136
              
              
              
              22,960
              
              
              
              4,998
              
              
              
              31,094December
      31, 2007
              
              
              3,189
              
              
              
              22,960
              
              
              
              4,722
              
              
              
              30,871Total
      Other LiabilitiesSeptember
      30, 2008
              
              
              967
              
              
              
              490
              
              
              
              783
              
              
              
              2,240December
      31, 2007
              
              
              976
              
              
              
              147
              
              
              
              741
              
              
              
              1,864Total
      EquitySeptember
      30, 2008
              
              
              719
              
              
              
              4,417
              
              
              
              6,933
              
              
              
              12,069December
      31, 2007
              
              
              815
              
              
              
              4,272
              
              
              
              6,934
              
              
              
              12,021Company's
      Investment, net (1)September
      30, 2008
              
              
              -
              
              
              
              4,649
              
              
              
              1,828
              
              
              
              6,477December
      31, 2007
              
              
              (1
              )
              
              
              4,701
              
              
              
              1,828
              
              
              
              6,528Summary
      of Operations:Total
      RevenueNine
      Months Ended September 30, 2008
              
              
              620
              
              
              
              2,653
              
              
              
              -
              
              
              
              3,273Nine
      Months Ended September 30, 2007
              
              
              604
              
              
              
              2,730
              
              
              
              5,560
              
              
              
              8,894Three
      Months Ended September 30, 2008
              
              
              202
              
              
              
              864
              
              
              
              -
              
              
              
              1,066Three
      Months Ended September 30, 2007
              
              
              203
              
              
              
              909
              
              
              
              1,951
              
              
              
              3,063Net
      Income (Loss)Nine
      Months Ended September 30, 2008
              
              
              (97
              )
              
              
              1,339
              
              
              
              -
              
              
              
              1,242Nine
      Months Ended September 30, 2007
              
              
              (155
              )
              
              
              1,407
              
              
              
              2
              
              
              
              1,254Three
      Months Ended September 30, 2008
              
              
              (30
              )
              
              
              430
              
              
              
              -
              
              
              
              400Three
      Months Ended September 30, 2007
              
              
              (58
              )
              
              
              470
              
              
              
              -
              
              
              
              412Company's
      recognition of equity in earningsNine
      Months Ended September 30, 2008
              
              
              -
              
              
              
              490
              
              
              
              -
              
              
              
              490Nine
      Months Ended September 30, 2007 (2)
              
              
              (1
              )
              
              
              521
              
              
              
              -
              
              
              
              520Three
      Months Ended September 30, 2008
              
              
              -
              
              
              
              159
              
              
              
              -
              
              
              
              159Three
      Months Ended September 30, 2007
              
              
              -
              
              
              
              175
              
              
              
              -
              
              
              
              175
   -13-
 Table of Contents
 
 
 LandDevelopmentApartment
                
                
                Commercial
                
                
                JointProperties
                
                
                Property
                
                
                Venture
                
                
                Total(in
      thousands)Summary
      of Cash Flows:Cash
      flows provided by (used in) operating activitiesNine
      Months Ended September 30, 2008
                
                $
                61
                
                
                $
                1,627
                
                
                $
                42
                
                
                $
                1,730Nine
      Months Ended September 30, 2007
                
                
                38
                
                
                
                1,710
                
                
                
                5,508
                
                
                
                7,256Three
      Months Ended September 30, 2008
                
                
                11
                
                
                
                650
                
                
                
                40
                
                
                
                701Three
      Months Ended September 30, 2007
                
                
                (12
                )
                
                
                865
                
                
                
                2,359
                
                
                
                3,212Company's
      share of cash flows from operating activitiesNine
      Months Ended September 30, 2008
                
                
                1
                
                
                
                736
                
                
                
                21
                
                
                
                758Nine
      Months Ended September 30, 2007
                
                
                -
                
                
                
                774
                
                
                
                2,754
                
                
                
                3,528Three
      Months Ended September 30, 2008
                
                
                -
                
                
                
                294
                
                
                
                20
                
                
                
                314Three
      Months Ended September 30, 2007
                
                
                -
                
                
                
                392
                
                
                
                1,179
                
                
                
                1,571Operating
      cash distributionsNine
      Months Ended September 30, 2008
                
                
                -
                
                
                
                1,194
                
                
                
                -
                
                
                
                1,194Nine
      Months Ended September 30, 2007
                
                
                -
                
                
                
                1,236
                
                
                
                -
                
                
                
                1,236Three
      Months Ended September 30, 2008
                
                
                -
                
                
                
                421
                
                
                
                -
                
                
                
                421Three
      Months Ended September 30, 2007
                
                
                -
                
                
                
                442
                
                
                
                -
                
                
                
                442Company's
      share of operating cash distributionsNine
      Months Ended September 30, 2008
                
                
                -
                
                
                
                541
                
                
                
                -
                
                
                
                541Nine
      Months Ended September 30, 2007
                
                
                -
                
                
                
                560
                
                
                
                -
                
                
                
                560Three
      Months Ended September 30, 2008
                
                
                -
                
                
                
                191
                
                
                
                -
                
                
                
                191Three
      Months Ended September 30, 2007
                
                
                -
                
                
                
                200
                
                
                
                -
                
                
                
                200
 Notes:
 (1)  Represents
the Company's net investment, including assets and accrued liabilities in the
consolidated balance sheet for unconsolidated
real estate entities.
 (2)  Excludes
collection of the El Monte note receivable, resulting in recognition of $1.5
million as Equity in Earnings, see Note 6.
 -14-
  (4)
              DEBT
 
 The Company's outstanding debt is
collateralized primarily by land, land improvements, receivables, investment
properties, investments in partnerships, and rental properties.  The
following table summarizes the indebtedness of the Company at September 30, 2008
and December 31, 2007 (in thousands):
  Maturity
              
              Interest
              
              Outstanding
      as ofDates
              
              Rates
              
              September
      30,
              
              December
      31,From/To
              
              From/To
              
              2008
              
              2007(Unaudited)
              
              (Audited)Recourse
      DebtCommunity
      Development (a), (b), (c), (d)
              
              
              05-01-09/03-01-23
              
              
              4%/8%
              
              $
              33,620
              
              $
              25,490General
      obligations (e)
              
              
              06-01-09/03-03-12
              
              Non-interestbearing/8.55%
              
              
              194
              
              
              99Total
      Recourse Debt
              
              
              
              
              
              
              
              
              33,814
              
              
              25,589Non-Recourse
      DebtInvestment
      Properties (f)(g)
              
              
              04-30-09/08-01-47
              
              
              4.95%/10%
              
              
              277,118
              
              
              279,981Total
      debt
              
              
              
              
              
              
              
              $
              310,932
              
              $
              305,570
 a)
              As
      of September 30, 2008, $25,629,000 of the community development recourse
      debt relates to the general obligation bonds issued by the Charles County
      government as described in detail under the heading "Financial
      Commitments" in Note 5.
 b)
              On
      April 14, 2006, the Company closed a three year $14,000,000 revolving
      acquisition and development line of credit loan (“the Revolver”) secured
      by a first lien deed of trust on property located in St. Charles,
      MD.  The maximum amount of the loan at any one time is
      $14,000,000, bears interest at Prime plus 0.75% (5.75% at September 30,
      2008) and matures on May 1, 2009.  The facility includes various
      sub-limits on a revolving basis for amounts to finance apartment project
      acquisitions and land development in St. Charles.  The terms
      require certain financial covenants to be calculated annually as of
      December 31, including a tangible net worth to senior debt ratio for ALD
      and a minimum net worth test for ACPT.  As of September 30, 2008
      $3,026,000 was outstanding on the
Revolver.
 c)
              LDA
      has a $10,000,000 revolving line of credit facility that bears interest at
      a fluctuating rate equivalent to the LIBOR Rate plus 225 basis points
      (5.038% at September 30, 2008).  The facility is to be used to
      fund the development of infrastructure in Parque Escorial and Parque El
      Comandante and matures on August 31, 2009.  The outstanding
      balance of this facility on September 30, 2008, was
      $2,754,000.
 d)
              On
      April 2, 2008, the Company secured a two-year, $3,600,000 construction
      loan for the construction of a commercial restaurant/office building
      within the O’Donnell Lake Restaurant Park.  The facility is
      secured by the land along with any improvements constructed and bears
      interest at Wall Street Journal published Prime Rate (5.0% at September
      30, 2008).  At the end of the two-year construction period, the
      Company may convert the loan to a 5-year permanent loan, amortized over a
      30 year period at a fixed interest rate to be determined.  As of
      September 30, 2008, $2,211,000 was outstanding under this facility leaving
      $1,389,000 available to fund completion of the
  building.
 e)
              The
      general recourse debt outstanding as of September 30, 2008, is made up of
      various capital leases outstanding within our U.S. and Puerto Rico
      operations, as well as installment loans for vehicles and other
      miscellaneous equipment.
 f)
              The
      non-recourse debt related to the investment properties is collateralized
      by the multifamily rental properties and the office building in Parque
      Escorial.  As of September 30, 2008, approximately $73,913,000
      of this debt is secured by the Federal Housing Administration ("FHA") or
      the Maryland Housing Fund.
 g)
              On
      May 12, 2008, IGP agreed to provide a fixed charge and debt service
      guarantee related to the Escorial Office Building I, Inc (“EOB”)
      mortgage.  The fixed charge and debt service guarantee requires
      IGP to contribute capital in cash in such amounts required to cause EOB to
      comply with the related financial covenants.  The guarantee will
      remain in full force until EOB has complied with the financial covenants
      for four consecutive quarters.
  The
Company’s loans contain various financial, cross collateral, cross default,
technical and restrictive provisions.  As of September 30, 2008, the
Company was in compliance with the financial covenants and the other provisions
of its loan agreements.
 
 -15-
 Table of Contents
 (5)
              COMMITMENTS
      AND CONTINGENT LIABILITIES
 
 Financial
Commitments
 Pursuant
to an agreement reached between ACPT and the Charles County Commissioners in
2002, the Company agreed to accelerate the construction of two major roadway
links to the Charles County (the "County") road system.  As part of
the agreement, the County agreed to issue general obligation public improvement
bonds to finance $20,000,000 of this construction guaranteed by letters of
credit provided by Lennar as part of a residential lot sales contract for 1,950
lots in Fairway Village.  These bonds were issued in three
installments with the final $6,000,000 installment issued in March
2006.  The bonds bear interest rates ranging from 4% to 8%, for a
blended lifetime rate of 5.1%, call for semi-annual interest payments and annual
principal payments and mature in fifteen years.  Under the terms of
bond repayment agreements between the Company and the County, the Company is
obligated to pay interest and principal on the full amount of the bonds; as
such, the Company recorded the full amount of the debt and a receivable from the
County representing the undisbursed bond proceeds to be advanced to the Company
as major infrastructure development within the project occurs.  As of
September 30, 2008, all of the bond proceeds had been used to fund the specified
development.  As part of the agreement, the Company will pay the
County a monthly payment equal to one-sixth of the semi-annual interest payments
and one-twelfth of the annual principal payment due on the Bonds.  The
County also requires ACPT to fund an escrow account from lot sales that will be
used to repay this obligation.
 In August
2005, the Company signed a memorandum of understanding ("MOU") with the Charles
County Commissioners regarding a land donation that is now the site of a minor
league baseball stadium and entertainment complex which opened in May of
2008.  Under the terms of the MOU, the Company donated 42 acres of
land in St. Charles to the County on December 31, 2005.  The Company
also agreed to expedite off-site utilities, storm-water management and road
construction improvements that will serve the entertainment complex and future
portions of St. Charles so that the improvements will be completed concurrently
with the entertainment complex.  The County will be responsible for
infrastructure improvements on the site of the complex.  In return,
the County agreed to issue additional general obligation bonds to finance the
infrastructure improvements.  In March 2006, $4,000,000 of bonds were
issued for this project, with an additional $3,000,000 issued in both March 2007
and March 2008.  These bonds bear interest rates ranging from 4.9% to
5.75%, for a blended lifetime rate of 5.2%, call for semi-annual interest
payments and annual principal payments and mature in fifteen
years.  The terms of the bond repayment agreement are similar to those
noted above.  As of September 30, 2008, $2,162,000 of these bond
proceeds are recorded as a receivable and available to fund the related
infrastructure.  The Company reached an agreement with Charles County
whereby the Company receives interest payments on any undistributed bond
proceeds held in escrow by the County.  In addition, the County agreed
to issue an additional 100 school allocations a year to St. Charles commencing
with the issuance of bonds.
 As of September 30, 2008, ACPT is
guarantor of $23,777,000 of surety bonds for the completion of land development
projects with Charles County; substantially all are for the benefit of the
Charles County Commissioners.
 
 Consulting
Agreement and Arrangement
 ACPT entered into a consulting and
retirement compensation agreement with Interstate General Company L.P.’s (“IGC”)
founder and Chief Executive Officer, James J. Wilson, effective October 5, 1998
(the "Consulting Agreement").  IGC was the predecessor company to
ACPT.  Under the terms of the Consulting Agreement, the Company paid
Mr. Wilson $200,000 per year through September 2008, and accordingly, no more
payments are due under this agreement.
  Guarantees
 ACPT and
its subsidiaries typically provide guarantees for another subsidiary's
loans.  In many cases more than one company guarantees the same
debt.  Since all of these companies are consolidated, the debt or
other financial commitment made by the subsidiaries to third parties and
guaranteed by ACPT, is included within ACPT's consolidated financial
statements.  As of September 30, 2008, ACPT has guaranteed $25,629,000
of outstanding debt owed by its subsidiaries.  IGP has guaranteed
$2,754,000 of its subsidiaries' outstanding debt.  The guarantees will
remain in effect until the debt service is fully repaid by the respective
borrowing subsidiary.  The terms of the debt service guarantees
outstanding range from one to fifteen years.  In addition to debt
service guarantees, both the Company and Lennar provided development completion
guarantees related to the St. Charles Active Adult Community Joint
Venture.  We do not expect any of these guarantees to impair the
individual subsidiary or the Company's ability to conduct business or to pursue
its future development plans.
  Legal
Matters
 In 2006,
a group of approximately 60 tenants of Capital Park Towers Apartments (“Capital
Park”) a property managed, but not owned by ARMC and located at 301 G Street,
S.W., Washington, D.C. filed a tenant petition with the Rent Administrator for
the District of Columbia challenging increases in rent implemented with respect
to said tenants units during the previous three year period (“Initial
Case”).  The Company's Chairman has an economic interest in the
property related to a note receivable from Capital Park.  Following the
initial petition, a group of 60 additional tenants filed a similar petition in
May of 2008.  The Initial Case is set for an initial hearing on the
merits on November 7, 2008.  While the Company has numerous defenses
to the claims asserted in both cases, at this time management believes that
potential exposure to damages in these cases is probable and estimates the loss
at approximately $230,000.  Generally, these types of losses are
covered by our insurance policies.  However, the Company has recently
been informed that our insurance carrier intends to deny these
claims.  We intend to vigorously defend against the claims asserted
and will continue to pursue coverage under our insurance
policies.  Given the current circumstances, the Company accrued
$230,000 in the third quarter 2008 related to the potential
losses.  However, absent a settlement of the case, it will likely take
a number of years before the case is concluded and a final determination
rendered.
  -16-
 Table of Contents
 There
have been no other material changes to the legal proceedings previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2007.
 The
Company and/or its subsidiaries have been named as defendants, along with other
companies, in tenant-related lawsuits. The Company carries liability insurance
against certain types of claims that management believes meets industry
standards.  To date, payments made to the plaintiffs of the
settled cases were covered by our insurance policy.  The Company
believes it has strong defenses to the claims, and intends to continue to defend
itself vigorously in these matters.
 In the
normal course of business, ACPT is involved in various pending or unasserted
claims.  In the opinion of management, these are not expected to have
a material impact on the financial condition or future operations of
ACPT.
  (6)
              RELATED
      PARTY TRANSACTIONS
 
 Certain officers and trustees of ACPT
conduct business with or have ownership interests in various entities that
conduct business with the Company.  The financial impact of the
related party transactions on the accompanying consolidated financial statements
is reflected below (in thousands):
 
 CONSOLIDATED
      STATEMENT OF INCOME:
              
              
              
              
              Nine
      Months Ended
              
              
              Three
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Management and Other FeesUnconsolidated
      subsidiaries with third party partners
              
              (A)
              
              
              $
              32
              
              
              $
              32
              
              
              $
              11
              
              
              $
              11Affiliates
      of J. Michael Wilson, CEO and Chairman
              
              
              
              
              
              -
              
              
              
              43
              
              
              
              -
              
              
              
              -$
              32
              
              
              $
              75
              
              
              $
              11
              
              
              $
              11Rental Property Revenues
              
              (B)
              
              
              $
              36
              
              
              $
              43
              
              
              $
              6
              
              
              $
              15Interest and Other IncomeUnconsolidated
      real estate entities with third party partners
              
              
              
              
              $
              6
              
              
              $
              6
              
              
              $
              2
              
              
              $
              2General and Administrative
      ExpenseReserve
      additions (reductions) and other write-offs-Unconsolidated
      real estate entities with third party partners
              
              (A)
              
              
              $
              (2
              )
              
              $
              25
              
              
              $
              7
              
              
              $
              14Reimbursement
      to IBC for ACPT's share of J. Michael Wilson's
compensation
              
              
              
              
              
              311
              
              
              
              293
              
              
              
              104
              
              
              
              98Reimbursement
      of administrative costs-Affiliates
      of J. Michael Wilson, CEO and Chairman
              
              
              
              
              
              (14
              )
              
              
              (18
              )
              
              
              (4
              )
              
              
              (5
              )Reimbursement
      of legal fees to attorney for J. Michael Wilson
              
              
              (C1
              )
              
              
              
              
              
              
              188
              
              
              
              
              
              
              
              140Consulting
      FeesJames
      J. Wilson, IGC Chairman and Director
              
              
              (C2
              )
              
              
              150
              
              
              
              150
              
              
              
              50
              
              
              
              50Thomas
      J. Shafer, Trustee
              
              
              (C3
              )
              
              
              45
              
              
              
              45
              
              
              
              15
              
              
              
              15$
              490
              
              
              $
              683
              
              
              $
              172
              
              
              $
              312BALANCE
      SHEET:
              
              
              
              
              
              Balance
              
              
              BalanceSeptember
      30,
              
              
              December
      31,2008
              
              
              2007Other AssetsReceivables
      - All unsecured and due on demandUnconsolidated
      Subsidiaries
              
              
              
              
              
              $
              5
              
              
              $
              -Affiliate
      of J. Michael Wilson, CEO and Chairman
              
              
              
              
              
              
              -
              
              
              
              5Total
              
              
              
              
              
              $
              5
              
              
              $
              5Other LiabilitiesPayable
      due to Affiliate of J. Michael Wilson, CEO and Chairman
              
              
              
              
              
              $
              13
              
              
              $
              -
 -17-
 Table of Contents
 (A)         Management
and Other Services
 The
Company provides management and other support services to its unconsolidated
subsidiaries and other affiliated entities in the normal course of
business.  The fees earned from these services are typically collected
on a monthly basis, one month in arrears.  Receivables are unsecured
and due on demand.  Certain partnerships experiencing cash shortfalls
have not paid timely.  Generally, receivable balances of these
partnerships are fully reserved, until satisfied or the prospect of
collectibility improves.  The collectibility of management fee
receivables is evaluated quarterly.  Any increase or decrease in the
reserves is reflected accordingly as additional bad debt expenses or recovery of
such expenses.
 At the
end of February 2007, G.L. Limited Partnership, which was owned by affiliates of
J. Michael Wilson, was sold to a third party.  Accordingly, we are no
longer the management agent for this property effective March 1,
2007.  Management fees generated by this property accounted for less
than 1% of the Company’s total revenue.
 
 (B)          Rental
Property Revenue
 On
September 1, 2006, the Company, through one of its Puerto Rican subsidiaries,
Escorial Office Building I, Inc. (“Landlord”), executed a lease with Caribe
Waste Technologies, Inc. (“CWT”), a company owned by the J. Michael Wilson
Family.  The lease provides for 1,842 square feet of office space to
be leased by CWT for five years at $19.00 per rentable square
foot.  The company provided CWT with an allowance of $9,000 in tenant
improvements which are being amortized over the life of the lease.  On
February 25, 2008, CWT exercised its rights under the lease and provided six
months written notice of its intention to terminate the lease, effective August
24, 2008.  The lease agreement is unconditionally guaranteed by
Interstate Business Corporation (“IBC”), a company owned by the J. Michael
Wilson Family.
 
 (C)          Other
 Other transactions with related parties
are as follows:
 1)
              In
      second quarter 2007, The Independent Trustees concluded that certain legal
      fees and expenses incurred by J. Michael Wilson related to seeking a
      strategic partner would be reimbursed by the Company.  The
      Independent Trustees authorized the Company to fund up to $225,000 of such
      costs, $188,000 of which were incurred through the third quarter of
      2007.
 2)
              Represents
      fees paid to James J. Wilson pursuant to a consulting and retirement
      agreement.  At Mr. Wilson's request, payments are made to
      Interstate Waste Technologies, Inc.
 3)
              Represents
      fees paid to Thomas J. Shafer, a trustee, pursuant to a consulting
      agreement.
 
 Related Party
Acquisitions
 
 El
Monte
 On April
30, 2004, the Company purchased a 50% limited partnership interest in El Monte
Properties S.E. ("El Monte") from Insular Properties Limited Partnership
("Insular") for $1,462,500.  Insular is owned by the J. Michael Wilson
Family.  Per the terms of the agreement, the Company was responsible
to fund $400,000 of capital improvements and lease stabilization costs, and had
a priority on cash distributions up to its advances plus accrued interest at 8%,
investment and a 13% cumulative preferred return on its
investment.  The purchase price was based on a third party appraisal
of $16,500,000 dated April 22, 2003.  The Company's limited
partnership investment was accounted for under the equity method of
accounting.
 In
December 2004, a third party buyer purchased El Monte for $20,000,000:
$17,000,000 in cash and $3,000,000 in two notes of $1,500,000 each that bear an
interest rate of prime plus 2%, with a ceiling of 9%, and mature on December 3,
2009.  The net cash proceeds from the sale of the real estate were
distributed to the partners.  As a result, the Company received
$2,500,000 in cash and recognized $986,000 of income in 2004.  El
Monte distributed a $1,500,000 note to the Company in January
2005.  On January 24, 2007, the Company received $1,707,000 as payment
in full of the principal balance and all accrued interest related to the El
Monte note receivable.  Accordingly, in 2007 the Company recorded
$1,500,000 as equity in earnings and $207,000 as interest income.
  (7)
              INCOME
      TAXES
 
 The total
amount of unrecognized tax benefits as of September 30, 2008, was
$15,095,000.  Included in the balance at September 30, 2008, were
$41,000 of tax positions that, if recognized, would affect the effective tax
rate.  A reconciliation of the beginning and ending amount of
unrecognized tax benefit (in thousands) is as follows:
  Unrecognized
      tax benefit at beginning of period (December 31, 2007)
                $
                14,869Change
      attributable to tax positions taken during a prior period
                
                252Change
      attributable to tax positions taken during the current
    period
                
                -Decrease
      attributable to settlements with taxing authorities
                
                -Decrease
      attributable to lapse of statute of limitations
                
                (26
                )Unrecognized
      tax benefit at end of period (September 30, 2008)
                $
                15,095
  -18-
 Table of Contents
  In
accordance with our accounting policy, we present accrued interest related to
uncertain tax positions as a component of interest expense and accrued penalties
as a component of income tax expense on the Consolidated Statement of
Income.  Our Consolidated Statements of Income for the nine months
ended September 30, 2008 and 2007, included interest expense of $1,031,000 and
$855,000, respectively and penalties of $58,000 and $143,000,
respectively.  Our Consolidated Statements of Income for the three
months ended September 30, 2008 and 2007, included interest expense of $298,000
and $304,000, respectively and penalties of $20,000 and $71,000,
respectively.  Our Consolidated Balance Sheets as of September 30,
2008 and December 31, 2007, included accrued interest of $3,844,000 and
$2,814,000, respectively and accrued penalties of $1,143,000 and $1,085,000,
respectively.
 The
Company currently does not have any tax returns under audit by the United States
Internal Revenue Service or the Puerto Rico Treasury
Department.  However, the tax returns filed in the United States for
the years ended December 31, 2005 through 2007 remain subject to
examination.  For Puerto Rico, the tax returns for the years ended
December 31, 2004 through 2007 remain subject to examination.  Within
the next twelve months, the Company does not anticipate any payments related to
settlement of any tax examinations.  There is a reasonable possibility
within the next twelve months the amount of unrecognized tax benefits will
decrease by $577,000 when the related statutes of limitations expire and certain
payments are recognized as taxable income.
  (8)
              SEGMENT
      INFORMATION
 
 ACPT has
two reportable segments: U.S. operations and Puerto Rico
operations.  The Company's chief decision-makers allocate resources
and evaluate the Company's performance based on these two
segments.  The U.S. segment is comprised of different components
grouped by product type or service, to include: investments in rental
properties, community development and property management
services.  The Puerto Rico segment entails the following components:
investment in rental properties, community development, homebuilding and
property management services.  The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies.
 
 Customer
Dependence
 Residential
land sales to Lennar within our U.S. segment were $5,903,000 for the nine months
ended September 30, 2008, which represents 16% of the U.S. segment's revenue and
10% of our total year-to-date consolidated revenue.  No other
customers accounted for more than 10% of our consolidated revenue for the nine
months ended September 30, 2008.
 Residential
land sales to Lennar within our U.S. segment were $5,131,000 for the nine months
ended September 30, 2007 which represented 14% of the U.S. segment's revenue and
8% of our total year-to-date consolidated revenue.  No customers
accounted for more than 10% of our consolidated revenue for the nine months
ended September 30, 2007.
 The
following presents the segment information for the nine and three months ended
September 30, 2008 and 2007 (in thousands):
 -19-
 Table of Contents
 United
                
                Puerto
                
                Inter-States
                
                Rico
                
                Segment
                
                TotalNine
      Months Ended September 30, 2008 (Unaudited):
                ($)
                
                ($)
                
                ($)
                
                ($)Rental
      property revenues
                
                29,676
                
                
                16,997
                
                -
                
                46,673Rental
      property operating expenses
                
                13,736
                
                
                8,571
                
                (16
                )
                22,291Land
      sales revenue
                
                6,457
                
                
                -
                
                -
                
                6,457Cost
      of land sales
                
                5,218
                
                
                -
                
                -
                
                5,218Home
      sales revenue
                
                -
                
                
                3,476
                
                -
                
                3,476Cost
      of home sales
                
                -
                
                
                2,694
                
                -
                
                2,694Management
      and other fees
                
                117
                
                
                471
                
                (20
                )
                568General,
      administrative, selling and marketing expense
                
                7,045
                
                
                1,928
                
                (4
                )
                8,969Depreciation
      and amortization
                
                4,684
                
                
                2,827
                
                -
                
                7,511Operating
      income
                
                5,567
                
                
                4,924
                
                -
                
                10,491Interest
      income
                
                300
                
                
                29
                
                (14
                )
                315Equity
      in earnings from unconsolidated entities
                
                (1
                )
                
                490
                
                -
                
                489Interest
      expense
                
                8,506
                
                
                4,288
                
                (14
                )
                12,780Minority
      interest in consolidated entities
                
                456
                
                
                1,235
                
                -
                
                1,691(Loss)
      income before benefit for income taxes
                
                (3,081
                )
                
                87
                
                -
                
                (2,994
                )Income
      tax benefit
                
                (931
                )
                
                (62
                )
                -
                
                (993
                )Net
      (loss) income
                
                (2,150
                )
                
                149
                
                -
                
                (2,001
                )Gross
      profit on land sales
                
                1,239
                
                
                -
                
                -
                
                1,239Gross
      profit on home sales
                
                -
                
                
                782
                
                -
                
                782Total
      assets
                
                262,446
                
                
                99,741
                
                (369
                )
                361,818Additions
      to long lived assets
                
                4,633
                
                
                794
                
                -
                
                5,427
 United
                
                Puerto
                
                Inter-States
                
                Rico
                
                Segment
                
                TotalNine
      Months Ended September 30, 2007 (Unaudited):
                ($)
                
                ($)
                
                ($)
                
                ($)Rental
      property revenues
                
                28,529
                
                16,720
                
                -
                
                45,249Rental
      property operating expenses
                
                14,376
                
                8,543
                
                (18
                )
                22,901Land
      sales revenue
                
                8,032
                
                -
                
                -
                
                8,032Cost
      of land sales
                
                5,930
                
                -
                
                -
                
                5,930Home
      sales revenue
                
                -
                
                6,113
                
                -
                
                6,113Cost
      of home sales
                
                -
                
                4,399
                
                -
                
                4,399Management
      and other fees
                
                299
                
                479
                
                (22
                )
                756General,
      administrative, selling and marketing expense
                
                6,355
                
                2,249
                
                (4
                )
                8,600Depreciation
      and amortization
                
                4,252
                
                2,757
                
                -
                
                7,009Operating
      income
                
                5,947
                
                5,364
                
                -
                
                11,311Interest
      income
                
                843
                
                228
                
                (80
                )
                991Equity
      in earnings from unconsolidated entities
                
                (1
                )
                2,021
                
                -
                
                2,020Interest
      expense
                
                9,436
                
                4,681
                
                (80
                )
                14,037Minority
      interest in consolidated entities
                
                332
                
                1,418
                
                -
                
                1,750(Loss)
      income before (benefit) provision for income taxes
                
                (2,975
                )
                1,697
                
                -
                
                (1,278
                )Income
      tax (benefit) provision
                
                (829
                )
                810
                
                -
                
                (19
                )Net
      (loss) income
                
                (2,146
                )
                887
                
                -
                
                (1,259
                )Gross
      profit on land sales
                
                2,102
                
                -
                
                -
                
                2,102Gross
      profit on home sales
                
                -
                
                1,714
                
                -
                
                1,714Total
      assets
                
                260,772
                
                101,056
                
                (1,624
                )
                360,204Additions
      to long lived assets
                
                6,226
                
                524
                
                -
                
                6,750
  -20-
 Table of Contents
 United
              
              Puerto
              Inter-States
              
              Rico
              Segment
              
              TotalThree
      Months Ended September 30, 2007 (Unaudited):
              ($)
              
              ($)
              ($)
              
              ($)Rental
      property revenues
              9,823
              
              5,594
              
              -
              
              15,417Rental
      property operating expenses
              4,887
              
              2,905
              
              (5
              )
              7,787Land
      sales revenue
              2,063
              
              -
              
              -
              
              2,063Cost
      of land sales
              1,574
              
              -
              
              -
              
              1,574Home
      sales revenue
              -
              
              899
              
              -
              
              899Cost
      of home sales
              -
              
              583
              
              -
              
              583Management
      and other fees
              91
              
              166
              
              (7
              )
              250General,
      administrative, selling and marketing expense
              2,432
              
              801
              
              (1
              )
              3,232Depreciation
      and amortization
              1,507
              
              921
              
              -
              
              2,428Operating
      income
              1,577
              
              1,449
              
              (1
              )
              3,025Interest
      income
              252
              
              2
              
              (25
              )
              229Equity
      in earnings from unconsolidated entities
              -
              
              175
              
              -
              
              175Interest
      expense
              3,210
              
              1,515
              
              (25
              )
              4,700Minority
      interest in consolidated entities
              159
              
              34
              
              -
              
              193(Loss)
      income before (benefit) provision for income taxes
              (1,539
              )
              134
              
              -
              
              (1,405
              )Income
      tax (benefit) provision
              (348
              )
              41
              
              -
              
              (307
              )Net
      (loss) income
              (1,191
              )
              93
              
              -
              
              (1,098
              )Gross
      profit on land sales
              489
              
              -
              
              -
              
              489Gross
      profit on home sales
              -
              
              316
              
              -
              
              316Total
      assets
              260,772
              
              101,056
              
              (1,624
              )
              360,204Additions
      to long lived assets
              1,707
              
              102
              
              -
              
              1,809
  (9)
              SUBSEQUENT
      EVENTS
 
 Appointment
of Stephen Griessel as Chief Executive Officer
 
 Effective
October 1, 2008, the Company appointed Mr. Stephen Griessel as the Company’s
Chief Executive Officer.  Effective the same date, J. Michael Wilson
resigned from that position, but will continue to serve as Chairman of the Board
of Trustees.  In connection with his appointment as Chief Executive
Officer, the Company entered into an employment agreement with Mr. Griessel
effective the same.  The agreement supersedes Mr. Griessel’s prior
consulting agreement with the Company, dated July 2, 2007.  The
agreement provides for Mr. Griessel to serve as the Company’s Chief Executive
Officer for a term expiring October 1, 2011, unless earlier terminated pursuant
to the terms of the agreement.  The agreement renews automatically for
successive one-year periods following October 1, 2011, unless either the Company
or Mr. Griessel notifies the other of non-renewal in accordance with the terms
of the agreement.
 
 The
agreement also provides that the Company will grant Mr. Griessel an award of
363,743 restricted common shares of beneficial interest.  Such shares
will be awarded pursuant to, and shall vest in accordance with, an award
agreement granted under the Company’s equity incentive plan and approved by the
Company’s Compensation Committee, subject to approval by the Company’s Board of
Trustees, with such award remaining subject to approval by the Company’s
shareholders at the Company’s annual meeting.  Half the shares awarded
will vest over five years with the remaining shares vesting based on performance
criteria to be determined by the Company’s Board of Trustees.  Mr.
Griessel has also entered into an agreement with Mr. Wilson and members of his
family pursuant to which the Wilsons have assigned to Mr. Griessel the economic
benefit of seven percent of the shares of common stock owned by
them.
  Retirement
of Edwin L. Kelly as President and Chief Operating Officer
 
 On
October 1, 2008, Mr. Edwin L. Kelly notified the Company that he will retire as
the Company’s President and Chief Operating Officer effective December 1,
2008.  Through December 1, 2008, Mr. Kelly will continue to be
compensated in accordance with the terms of the Executive Retention Agreement
between him and the Company.  On December 1, 2008, his agreement will
terminate in accordance with its terms, and it will not be
renewed.  Pursuant to the agreement, Mr. Kelly will receive a
severance payment equal to 36 months of his base salary to be paid in a single
lump sum on December 1, 2008.  The Company has also agreed to enter
into a consulting agreement with Mr. Kelly for an initial term of one
year.
  Revolving
Line of Credit
 On
October 20, 2008, the Company received $3,546,000 from its revolving acquisition
and development line of credit.  With this draw, the Company has
$6,572,000 outstanding on this facility.
  -21-
 Table of Contents
 ITEM
      2.
              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
 
 FORWARD-LOOKING
STATEMENTS
 The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing in this
report.  Historical results set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operation and the Financial
Statements should not be taken as indicative of our future
operations.
 This quarterly report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  These include statements about our
business outlook, market and economic conditions, strategies, future plans,
anticipated costs and expenses, capital spending, and any other statements that
are not historical.  The accuracy of these statements is subject to a
number of risks, uncertainties, and other factors that may cause our actual
results, performance or achievements of the Company to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements.  Those items are discussed under "Risk
Factors" in Part I, Item 1A to the Form 10-K for the year ended December 31,
2007.
  EXECUTIVE
SUMMARY OF RESULTS
 Consolidated
operating revenues are derived primarily from rental revenue, community
development land sales and home sales.  For the nine and three months
ended September 30, 2008, our consolidated rental revenues increased $1,424,000
and $319,000 or 3% and 2%, respectively, as compared to the same periods of
2007.  The increase was primarily attributable to construction of new
units in our United States segment as well as overall rent increases at
comparable properties in both the United States and Puerto Rico
segments.
 Community
development land sales for the nine and three months ended September 30, 2008
decreased $1,575,000 and $1,603,000 or 20% or 78%, respectively, as compared to
the same period of 2007.  Land sales revenue in any one period is
affected by the timing of lot sales, the mix of lot type as well as a mix
between residential and commercial sales.  For the nine-month period,
community development land sales were less than the prior period due to
decreases in commercial land sales, decreases in the recognition of previously
deferred revenue, offset in part by increases in residential lot sales. For the
three-month period, community development land sales were also less than prior
period as there were no residential lot sales and less recognition of previously
deferred revenue during the third quarter 2008.
 Home
sales for the nine and three months ended September 30, 2008 decreased
$2,637,000 and $405,000 or 43% and 45%, respectively, as compared to the same
period of 2007.  Home sales, currently sourced from the Puerto Rico
segment, are impacted by the local real estate market.  The Company
settled fourteen and two units during the nine and three months ended September
30, 2008, respectively, as compared to twenty-three and three units,
respectively, closed during the same periods of 2007.  As of September
30, 2008, seven completed units remain within inventory, of which we currently
have one unit under contract.  We currently believe that the remaining
units will sell within the next twelve months.
 On a
consolidated basis, the Company reported a net loss for the nine and three
months ended September 30, 2008 of $2,001,000 and $630,000,
respectively.  The net losses for the nine and three months ended
September 30, 2008 include $993,000 and $443,000 as benefits for income taxes,
resulting in consolidated effective tax rates of approximately 33% and 41%,
respectively.  The consolidated effective rate for the nine months
ended September 30, 2008 was impacted by the benefit recorded for the net
losses, offset by accrued penalties on uncertain tax positions and certain
nondeductible permanent items.  The consolidated effective rate for
the three months ended September 30, 2008 was the result of a benefit recorded
for losses from our United States segment at the United States statutory rate
offset in part by a provision recorded for income reported for the Puerto Rico
segment at the Puerto Rico statutory rate.  For further discussion of
these items, see the provision for income taxes discussion within the United
States and Puerto Rico segment discussion.
 Please
refer to the Results of Operations section of Management’s Discussion and
Analysis for additional details surrounding the results of each of our operating
segments.
  CRITICAL
ACCOUNTING POLICIES
 The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States, which we refer to as GAAP, requires management to use judgment in the
application of accounting policies, including making estimates and
assumptions.  These judgments affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods.  If our judgment or interpretation of
the facts and circumstances relating to various transactions had been different,
it is possible that different accounting policies would have been applied
resulting in a different presentation of our financial statements.
 Refer to
the Company’s 2007 Annual Report on Form 10-K for a discussion of critical
accounting policies, which include sales, profit recognition and cost
capitalization, investment in unconsolidated real estate entities, impairment of
long-lived assets, depreciation of investments in real estate, income taxes and
contingencies.  For the nine and three months ended September 30,
2008, there were no material changes to our policies.
 
 RESULTS
OF OPERATIONS
 The
following discussion is based on the consolidated financial statements of the
Company.  It compares the results of operations of the Company for the
nine and three months ended September 30, 2008 (unaudited), with the nine and
three months ended September 30, 2007 (unaudited).  Historically, the
Company’s financial results have been significantly affected by the cyclical
nature of the real estate industry.  Accordingly, the Company’s
historical financial statements may not be indicative of future results. This
discussion should be read in conjunction with the accompanying consolidated
financial statements and notes included elsewhere in this report and within our
Annual Report on Form 10-K for the year ended December 31, 2007.
 
 -22-
 Table of Contents
 Results
of Operations - U.S. Operations:
 For the
nine and three months ended September 30, 2008, our U.S. segment generated
operating income of $5,567,000 and $1,684,000, respectively, compared to
operating income of $5,947,000 and $1,577,000 for the nine and three months
ended September 30, 2007, respectively.  Additional information and
analysis of the U.S. operations are as follows:
  Rental
Property Revenues and Operating Expenses - U.S. Operations:
 As of
September 30, 2008, nineteen U.S. based apartment properties, representing 3,256
units, in which we hold an ownership interest qualified for the consolidation
method of accounting.  The rules of consolidation require that we
include within our financial statements the consolidated apartment properties'
total revenue and operating expenses.
 As of
September 30, 2008, thirteen of the consolidated properties were market rent
properties, representing 1,856 units, allowing us to determine the appropriate
rental rates.  Even though we can determine the rents, 54 of our units
at one of our market rent properties must be leased to tenants with low to
moderate income.  HUD subsidizes three of the properties representing
836 units and the three remaining properties are a mix of 137 subsidized units
and 427 market rent units.  HUD dictates the rents of the subsidized
units.
 
 Apartment
Construction and Acquisitions
 On
January 31, 2007, we completed our newest addition to our rental apartment
properties in St. Charles' Fairway Village, the Sheffield Greens Apartments
(“Sheffield Greens”).  The 252-unit apartment project consists of
nine, 3-story buildings and offers 1 and 2 bedroom units ranging in size from
800 to 1,400 square feet.  Construction activities were started in the
fourth quarter of 2005 and leasing efforts began in the first quarter of
2006.  The first five buildings became available for occupancy during
the fourth quarter of 2006 and the final four buildings were ready for occupancy
in January 2007.
 
 Nine
months ended
 For the
nine months ended September 30, 2008, rental property revenues increased
$1,147,000 or 4% to $29,676,000 compared to $28,529,000 for the nine months
ended September 30, 2007.  The increase in rental revenues was
primarily the result of additional revenues for Sheffield Greens Apartments
which accounted for approximately $664,000 of the difference.  The
increase was also attributable to an overall 2% increase in rents between
periods.  These rental revenue increases were offset in part by
increases in the vacancy rate at certain multifamily apartment properties in St.
Charles and Baltimore.  However, incentives implemented by management
to address the vacancy rates at these properties have been successful as vacancy
rates have been reduced between the second and third quarters of
2008.
 Rental
property operating expenses decreased $640,000 or 4% for the nine months ended
September 30, 2008 to $13,736,000 compared to $14,376,000 for the same period of
2007.  The overall decrease in rental property operating expenses was
the result of cost cutting measures implemented at the end of 2007 and into
2008.  The cost cutting measures resulted in decreased operating
expenses for comparable properties of $673,000 or 5%.  The decreases
were experienced primarily in advertising expense, office salaries and expenses,
security, grounds expense, repairs and maintenance, snow removal,
rehabilitation, painting & decorating and insurance.  This amount
is net of a significant increase noted in property taxes of $193,000 or 14% at
comparable properties.  Partially offsetting these decreases was an
increase in operating expenses for Sheffield Greens Apartments of $322,000
related to partial operations in the first half of 2007.
 
 Three
months ended
 For the
three months ended September 30, 2008, rental property revenues increased
$159,000 or 2% to $9,982,000 compared to $9,823,000 for the three months ended
September 30, 2007.  Overall, comparable gross potential rental
revenues increased $181,000 or 2%.  (The increase was offset in part
by a $22,000 increase in vacancy rates.)  As noted above,
incentives implemented by management to address the vacancy rates have been
successful and management has noted improvement in vacancies since the second
quarter.
 Rental
property operating expenses decreased $375,000 or 8% for the third quarter of
2008 to $4,512,000 compared to $4,887,000 for the third quarter of
2007.  The overall decrease in rental property operating expenses was
the result of cost cutting measures implemented at the end of 2007 and into
2008.  Operating expense decreases were experienced primarily within
advertising, concessions, office salaries and expenses, grounds and repairs and
maintenance.  Offsetting the noted decreases were increases in
utilities and real estate taxes.
 
 -23-
 Table of Contents
 Community
Development - U.S. Operations:
 Land
sales revenue in any one period is affected by the mix of lot sizes and, to a
greater extent, the mix between residential and commercial sales.  In
March 2004, the Company executed Development and Purchase Agreements with Lennar
Corporation (the “Lennar Agreements”) to develop and sell 1,950 residential lots
(1,359 single-family lots and 591 town home lots) in Fairway Village in St.
Charles, Maryland.  The Lennar Agreements require the homebuilder to
provide $20,000,000 in letters of credit to secure the purchase of the
lots.  As security for the Company’s obligation to develop the lots, a
junior lien was placed on the residential portion of Fairway
Village.  The agreements require Lennar to purchase 200 residential
lots per year, provided that they are developed and available for delivery as
defined by the Development Agreement.  For each lot sold in Fairway
Village, the Company must deposit $10,300 in an escrow account to fund the
principal payments due to Charles County, at which time the lots are released
from the junior lien.  In December 2007, the Company agreed to an
amendment to the Lennar Agreements which temporarily reduced the final lot price
for 100 lots (51 lots purchased by Lennar in December 2007 and 49 lots purchased
during 2008) from 30% to 22.5% of the base price of the home sold on the lot,
with guaranteed minimum prices of $78,000 per single family lot and $68,000 per
townhome lot.  During the first nine months of 2008, Lennar actually
purchased 69 total lots, 20 more than required by the December
Amendment.  The Company agreed that these additional 20 lots would be
sold with the same terms as those covered by the December
Amendment.
 Sales are
closed on a lot-by-lot basis at the time when the builder purchases the
lot.  The final selling price per lot sold to Lennar may exceed the
guaranteed minimum price recognized at closing since the final lot price is
based on a percentage of the base price of the home sold on the lot, but not
less than the guaranteed minimum price.  Additional revenue exceeding
the guaranteed minimum take down price per lot will be recognized upon Lennar's
settlement with the respective homebuyers.
 Residential
lots vary in size and location resulting in pricing
differences.  Gross margins are calculated based on the total
estimated sales values based on current sales prices for all remaining lots
within a neighborhood as compared to the total estimated costs.
 Commercial
land is typically sold by contract that allows for a study period and delayed
settlement until the purchaser obtains the necessary permits for
development.  The sales prices and gross margins for commercial
parcels vary significantly depending on the location, size, extent of
development and ultimate use.  Commercial land sales are generally
cyclical.
 Community
development land sales revenue decreased $1,575,000 for the nine months ended
September 30, 2008 to $6,457,000 as compared to $8,032,000 for the nine months
ended September 30, 2007.  The decrease was primarily related to fewer
commercial land sales and less recognition of previously deferred revenue,
partially offset by an increase in residential land sales between the nine-month
periods.
 Community
development land sales revenue decreased $1,603,000 or 78% for the three months
ended September 30, 2008 to $460,000 as compared to $2,063,000 for the three
months ended September 30, 2007.  The overall decrease primarily
resulted from no residential land sales during the third quarter 2008 as well as
less recognition of previously deferred revenue as compared to the third quarter
of 2007.  Further discussions of the components of these variances are
as follows:
 
 Residential
Land Sales
 For the
nine months ended September 30, 2008, we recognized $5,479,000 related to the
delivery of eight townhome lots and sixty-one single family lots to Lennar as
compared to $2,255,000 consisting of twenty-four townhome lots and three single
family lots delivered in the nine months ended September 30,
2007.  For the lots delivered in 2008, we recognized as revenue the
minimum guaranteed price of $68,000 per townhome lot and $78,000 per single
family lot, plus water and sewer fees, road fees and other off-site
fees.  For the lots delivered in 2007, we recognized as revenue an
average minimum guaranteed price of $76,667 per townhome lot and $115,333 per
single family lot, plus water and sewer fees, road fees and other off-site
fees.
 For the
three months ended September 30, 2008, we did not deliver any lots to
Lennar.  For the same period of 2007, we recognized $650,000 related
to the delivery of ten townhome lots.  These lots represent an average
minimum guaranteed price of $65,000 per townhome lot.  In addition, the
Company receives water and sewer fees, road fees and other off-site
fees.
 The
Company recognizes additional revenue based on a percentage of the final
settlement price of the home sold by Lennar to the homebuyer, to the extent
greater than the guaranteed minimum price, as provided by our agreement with
Lennar.  For the nine and three months ended September 30, 2008, the
Company recognized $424,000 and $211,000, respectively, of additional revenue
for lots that were previously delivered to Lennar.  For the nine and
three months ended September 30, 2007, the Company recognized $1,813,000 and
$727,000, respectively, of additional revenue for lots that were previously
delivered to Lennar.
 As of
September 30, 2008, 1,441 lots remained under contract to Lennar, of which 60
single family lots were developed and ready for delivery.
  Commercial
Land Sales
 For the
nine months ended September 30, 2008, we sold 1.89 commercial acres in St.
Charles for $362,000.  This compares to 6.81 commercial acres in St.
Charles for $2,717,000 for the nine months ended September 30,
2007.  For the three months ended September 30, 2008, we sold .90
commercial acres in St. Charles for $178,000 compared to 1.03 commercial acres
for $180,000 for the third quarter 2007.  As of September 30, 2008,
our commercial sales backlog contained 82.15 acres under contract for a total of
$16,275,000.
 
 -24-
 Table of Contents
 St.
Charles Active Adult Community, LLC - Land Joint Venture
 In
September 2004, the Company entered into a joint venture agreement with Lennar
Corporation for the development of a 352-unit, active adult community located in
St. Charles, Maryland.  The Company manages the project’s development
for a market rate fee pursuant to a management agreement.  In
September 2004, the Company transferred land to the joint venture in exchange
for a 50% ownership interest and $4,277,000 in cash.  The Company’s
investment in the joint venture was recorded at 50% of the historical cost basis
of the land with the other 50% recorded within our deferred charges and other
assets.  The proceeds received are reflected as deferred
revenue.  The deferred revenue and related deferred costs will be
recognized into income as the joint venture sells lots to Lennar.  In
March 2005, the joint venture closed a non-recourse development loan which was
amended in September 2006, again in December 2006, and again in October
2007.  Most recently, the development loan was modified to provide a
one-year delay in development of the project, as to date, lot development has
outpaced sales.  Per the terms of the loan, both the Company and
Lennar provided development completion guarantees.  The Company is
currently negotiating with Lennar for their purchase of the Company’s equity
within this Joint Venture.
 In the
nine months ended September 30, 2008, the joint venture did not deliver any lots
to Lennar.  However, in the nine and three months ended September 30,
2007, the joint venture delivered 48 and 18 lots to
Lennar.  Accordingly, the Company recognized $1,063,000 and $408,000
in deferred revenue and off-site fees and $358,000 and $140,000 of deferred
costs for the nine and three months ended September 30, 2007,
respectively.
  Gross
Margin on Land Sales
 The gross
margin on land sales for the nine and three months ended September 30, 2008 were
19% and negative 7%, respectively, as compared to 26% and 24% for the same
periods of 2007, respectively.  Gross margins differ from period to
period depending on the mix of land sold as well as volume of sales available to
absorb certain period costs.  Excluding period costs, gross margins
for the nine months ended September 30, 2008 were 27% for residential land sales
and 30% for commercial sales as compared to residential margins of 42% and
commercial margins of 17% for the same period 2007.  The commercial
margins for 2007 were impacted by increases in the estimated cost of
constructing a boardwalk within the O’Donnell Lake Restaurant Park as the actual
bid proposals received were higher than the engineer’s expected
cost.
 For the
three months ended September 30, 2008, sales volumes were insufficient to absorb
period costs, resulting in negative margins.  Excluding period costs,
gross margins for the three months ended September 30, 2008 were 27% for
residential land sales and 29% for commercial sales as compared to residential
margins of 30% and commercial margins of 37% for the same period
2007.
 
 Customer
Dependence
 Residential
land sales to Lennar within our U.S. segment were $5,903,000 for the nine months
ended September 30, 2008, which represents 16% of the U.S. segment's revenue and
10% of our total year-to-date consolidated revenue.  No other
customers accounted for more than 10% of our consolidated revenue for the nine
months ended September 30, 2008.  Loss of all or a substantial portion
of our land sales, as well as the joint venture's land sales, to Lennar would
have a significant adverse effect on our financial results until such lost sales
could be replaced.
  Management
and Other Fees - U.S. Operations:
 We earn
monthly management fees from all of the apartment properties that we own, as
well as our management of apartment properties owned by third parties and
affiliates of J. Michael Wilson.  Effective February 28, 2007, the
Company’s management agreement with G.L. Limited Partnership was terminated upon
the sale of the apartment property to a third party.  Management fees
generated by this property accounted for less than 1% of the Company’s total
revenue.
 We
receive an additional fee from the properties that we manage for their use of
the property management computer system and a fee for vehicles purchased by the
Company for use on behalf of the properties.  The costs of the
computer system and vehicles are reflected within depreciation
expense.
 The
Company manages the project development of the joint venture with Lennar for a
market rate fee pursuant to a management agreement.  These fees are
based on the cost of the project and a prorated share is earned when each lot is
sold.  As noted above, the Company is currently negotiating with
Lennar for their purchase of the Company’s equity within the Joint Venture, at
which point the Company would no longer receive management fees from the Joint
Venture.
 Management
fees for the nine months ended September 30, 2008 decreased $182,000 to $117,000
as compared to $299,000 for the same period of 2007.  Management fees
for the three months ended September 30, 2008 decreased $53,000 to $38,000 as
compared to $91,000 for the same period of 2007.  The decreases in the
nine and three month periods were primarily as a result of the reduction in
number of lots delivered by the joint venture.  Management fees
presented on the consolidated income statements include only the fees earned
from the non-controlled properties; the fees earned from the controlled
properties are eliminated in consolidation.
 
 -25-
 Table of Contents
 General,
Administrative, Selling and Marketing Expense - U.S. Operations:
 The costs
associated with the oversight of our U.S. operations, accounting, human
resources, office management and technology, as well as corporate and other
executive office costs are included in this section.  ARMC employs the
centralized office management approach for its property management services for
our properties located in St. Charles, Maryland, our properties located in the
Baltimore, Maryland area and the property in Virginia and, to a lesser extent,
the other properties that we manage.  Our unconsolidated and
managed-only apartment properties reimburse ARMC for certain costs incurred at
the central office that are attributable to the operations of those
properties.  In accordance with EITF Topic 01-14, "Income Statement Characterization of
Reimbursements Received for Out of Pocket Expenses Incurred," the cost
and reimbursement of these costs are not included in general and administrative
expenses, but rather they are reflected as separate line items on the
consolidated income statement.
 For the
nine months ended September 30, 2008, general, administrative, selling and
marketing costs incurred within our U.S. operations increased $690,000 or 11% to
$7,045,000 compared to $6,355,000 for the same period of 2007.  The
increase is primarily attributable to expenses associated with a severance
accrual related to the departure of the Chief Financial Officer, accruals for
another executive retention agreement as well as an accrual related to the
Capital Park litigation.  In addition, legal costs increased for the
nine months ended September 30, 2008 as compared to the same period of 2007 due
to an internal investigation.  Accounting and audit expenses were also
greater than the prior period due to certain tax structuring
services.  Board of Trustee fees were also more for the first nine
months of 2008 due to the decision of the Trustees’ Share Incentive Plan
Committee to accelerate the vesting of restricted shares for Trustees whose
terms ended in June 2008, as well an increase in the size of the board and
increased fee accruals for meetings held.  These increases were
partially offset by a reduction in the accrual for stock appreciation rights due
to a decrease in share price, as well as a decrease in the number of rights
remaining outstanding, a decrease in strategic planning expenses, a decrease in
selling and marketing expenses and a decrease in advertising
expenses.
 For the
three months ended September 30, 2008, general, administrative, selling and
marketing costs incurred within our U.S. operations decreased $166,000 or 7% to
$2,266,000 compared to $2,432,000 for the same period of 2007.  The
decrease is primarily attributable to decreases in strategic planning expenses
as these efforts ceased during the second quarter 2008.  There were
also noted decreases in accrual for stock appreciation rights due to a decrease
in share price, decreases in salaries and benefits expenses as a result of the
recent departure of the former Chief Financial Officer and reduced bonus
accruals and decreases in selling and marketing expenses.  Partially
offsetting these decreases was an accrual related to the Capital Park litigation
as well as increases noted in accounting and audit expenses due to certain tax
structuring services, increases in legal fees due to an internal investigation
wrapped up during the third quarter of 2008 and increased Board of Trustee
expenses due to an increased number of meetings as compared to the prior
year.
 
 Depreciation
Expense - U.S. Operations:
 Depreciation
expense increased $432,000 to $4,684,000 for the first nine months of 2008
compared to $4,252,000 for the same period in 2007.  The increase in
depreciation is primarily the result of depreciation related to the addition of
Sheffield Greens Apartments.  Depreciation expense for the third
quarter 2008 increased $18,000 to $1,525,000 compared to $1,507,000 for the
third quarter 2007.
  Interest
Income – U.S. Operations:
 Interest
income decreased $543,000 to $300,000 for the nine months ended September 30,
2008, as compared to $843,000 for the nine months ended September 30,
2007.  For the three months ended September 30, 2008, interest income
decreased $181,000 to $71,000, as compared to $252,000 for the three months
ended September 30, 2007.  The decrease was primarily the result of
undistributed bond proceeds held by the County being used to fund development
costs, resulting in a reduction of interest income earned on these
funds.  In addition, the interest rate earned on the escrowed funds
decreased between periods.
 
 Interest
Expense - U.S. Operations:
 The
Company considers interest expense on all U.S. debt available for capitalization
to the extent of average qualifying assets for the period.  Interest
specific to the construction of qualifying assets, represented primarily by our
recourse debt, is first considered for capitalization.  To the extent
qualifying assets exceed debt specifically identified, a weighted average rate
including all other debt of the U.S. segment is applied.  Any excess
interest is reflected as interest expense.  For 2008 and 2007, the
excess interest primarily relates to the interest incurred on the non-recourse
debt from our investment properties.
 For the
nine months ended September 30, 2008, interest expense decreased $930,000 or 10%
to $8,506,000, as compared to $9,436,000 for the same period of
2007.  For the three months ended September 30, 2008, interest expense
decreased $388,000 or 12% to $2,822,000, as compared to $3,210,000 for the same
period of 2007.  The decreases for the nine and three month periods
were primarily attributable to an increase in qualifying assets eligible for
interest capitalization as new Apartment and Condominium projects begin in
Fairway Village’s Gleneagles section, the construction of an office building
within O’Donnell Lake Restaurant Park, and additional infrastructure investments
as the Company nears completion of the County Road projects.  In
addition, interest expense decreased as a result of routine amortization of our
mortgage notes.
 For the
nine and three months ended September 30, 2008, $1,942,000 and $696,000 of
interest cost was capitalized, respectively.  For the nine and three
months ended September 30, 2007, $926,000 and $325,000 of interest cost was
capitalized, respectively.
  -26-
 Table of Contents
 Minority
Interest in Consolidated Entities – U.S. Operations:
 The
Company records minority interest expense related to the minority partners’
share of the consolidated apartment partnerships earnings and distributions to
minority partners in excess of their basis in the consolidated
partnership.  Losses charged to the minority interest are limited to
the minority partners’ basis in the partnership.  Because the minority
interest holders in most of our partnerships have received distributions in
excess of their basis, we anticipate volatility in minority interest
expense.  Although this allows us to recognize 100 percent of the
income of the partnerships up to accumulated distributions and losses in excess
of the minority partners’ basis previously required to be recognized as our
expense, we will be required to expense 100 percent of future distributions to
minority partners and any subsequent losses.
 For the
nine months ended September 30, 2008, minority interest in consolidated entities
increased $124,000 to $456,000, as compared to $332,000 for the same period of
2007.  For the three months ended September 30, 2008, minority
interest in consolidated entities increased $174,000 to $333,000, as compared to
$159,000 for the same period of 2007.  The increases for the nine and
three-month periods were the result of an increase in surplus cash distributions
made to minority partners between periods.
  Provision
for Income Taxes – U.S. Operations:
 The effective
tax rates for the nine and three months ended September 30, 2008, and September
30, 2007, were 30% and 37% and 28% and 23%, respectively.  The
statutory rate is 40%.  The effective tax rates for 2008 and 2007
differ from the statutory rate due to relatively small net losses reported for
the periods, the related benefit for which, were partially offset by accrued
penalties on uncertain tax positions.
  Results
of Operations - Puerto Rico Operations:
 For the
nine and three months ended September 30, 2008, our Puerto Rico segment
generated operating income of $4,924,000 and $1,545,000, respectively, compared
to operating income of $5,364,000 and $1,449,000 for the nine and three months
ended September 30, 2007, respectively.  Additional information and
analysis of the Puerto Rico operations are as follows:
 
 Rental
Property Revenues and Operating Expenses - Puerto Rico Operations:
 As of
September 30, 2008, nine Puerto Rico-based apartment properties, representing
twelve apartment complexes totaling 2,653 units, in which we hold an ownership
interest (“Puerto Rico Apartments”) qualified for the consolidation method of
accounting.  The rules of consolidation require that we include within
our financial statements the consolidated apartment properties' total revenue
and operating expenses.  As of September 30, 2008, all of the Puerto
Rico Apartments were HUD subsidized projects with rental rates governed by
HUD.
 Our
Puerto Rico rental property portfolio also includes the operations of a
commercial rental property in the community of Parque Escorial, known as
Escorial Building One.  The company constructed and holds a 100%
ownership interest in Escorial Building One, which commenced operations in
September 2005.  Escorial Building One is a three-story building with
approximately 56,000 square feet of office space for lease.  The
Company moved the Puerto Rico Corporate Office to the new facilities in the
third quarter of 2005 and leases approximately 20% of the
building.  The building was 76% leased and 43% occupied, including the
Company’s occupancy.  The Company recently signed a lease with the
University of Phoenix representing 33% of the facility and is currently
completing leasehold improvements prior to their occupancy.
 
 Nine
months ended
 Rental
property revenues increased $277,000 or 2% to $16,997,000 for the nine months
ended September 30, 2008 compared to $16,720,000 for the same period of
2007.  The increase was the result of overall rent increases for our
HUD subsidized multifamily apartment properties of 2% while commercial revenues
decreased by $79,000 or 21% due to reduced occupancy between
periods.
 Rental
operating expenses increased $28,000 or less than 1% to $8,571,000 for the nine
months ended September 30, 2008 compared to $8,543,000 for the same period of
2007.  The increase was related to overall inflationary increases of
2% for our multifamily apartment properties offset in part by reduced operating
expenses of $99,000 or 18% for our commercial property due to bad debt expense,
advertising and leasing concession during the nine months ended September 30,
2007, with no comparable amounts for the same period of 2008.
  Three
months ended
 Rental
property revenues increased $160,000 or 3% to $5,754,000 for the three months
ended September 30, 2008 compared to $5,594,000 for the same period of
2007.  The increase for the third quarter of 2008 as compared to the
third quarter 2007 was the result of overall rent increases for our HUD
subsidized multifamily apartment properties of 3% while commercial revenues
decreased by $15,000 or 13% due to reduced occupancy between
periods.
 Rental
operating expenses decreased $38,000 or 1% to $2,867,000 for the three months
ended September 30, 2008 compared to $2,905,000 for the same period of
2007.  The decrease for the third quarter of 2008 was related to
reduced operating expenses for our commercial property due to advertising
expense in the third quarter of 2007 with no comparable amounts for the same
period of 2008.
  Community
Development - Puerto Rico Operations:
 Total
land sales revenue in any one period is affected by commercial sales which are
cyclical in nature and usually have a noticeable positive impact on our earnings
in the period in which settlement is made.
 There
were no community development land sales during the nine or three months ended
September 30, 2008 and 2007.  There were no sales contracts in backlog
at September 30, 2008.
  -27-
 Table of Contents
 Homebuilding
– Puerto Rico Operations:
 The
Company organizes corporations as needed to operate each individual homebuilding
project.  In April 2004, the Company commenced the construction of a
160-unit mid-rise condominium complex known as Torres del Escorial
(“Torres”).  The condominium units were offered to buyers in the
market in January 2005 and delivery of the units commenced in the fourth quarter
of 2005.  The condominium units are sold individually from an onsite
sales office to pre-qualified homebuyers.
 For the
nine months ended September 30, 2008, homebuilding revenues decreased $2,637,000
or 43% as compared to the nine months ended September 30, 2007.  The
decrease was primarily driven by a reduction in the number of units and a
decrease in the average selling price per unit.  Within the Torres
project and during the nine months ended September 30, 2008 fourteen units were
closed at an average selling price of approximately $248,000, generating
aggregate revenues of $3,476,000.  During the nine months ended
September 30, 2007, twenty-three units within the Torres project were closed at
an average selling price of $266,000 per unit generating $6,113,000 in home
sales revenue.  The reduced average selling price per unit was the
result of the type or mix of units sold during the respective
periods.
 For the
three months ended September 30, 2008, homebuilding revenues decreased $405,000
or 45% as compared to the three months ended September 30, 2007.  The
decrease was primarily driven by a reduction in the number of units sold as well
as the average selling price per unit.  Within the Torres project and
during the three-month period ended September 30, 2008, two units were closed at
an average selling price of approximately $247,000 per unit, generating
aggregate revenues of $494,000.  During the third quarter of 2007
three units were closed at an average selling price of approximately $300,000,
generating aggregate revenues of $899,000.  The reduced average
selling price per unit was the result of the type or mix of units sold during
the respective periods.
 The gross
margins for the nine and three-month periods ended September 30, 2008 and 2007
were 22% and 20% and 28% and 35%, respectively.  The decrease in the
gross profit margins between 2008 and 2007 is attributable to the reduction in
average selling price of the units for the respective periods due to the mix of
unit types sold during the respective periods.
 As of
September 30, 2008, seven units remain unsold, one of which is currently under
contract at an average selling price of $254,000.  As part of a
promotional campaign, effective January 2008, the deposit in each sales contract
is backed by $3,000 as opposed to the $6,000 deposit previously
required.  In addition, the company is currently offering an incentive
of $7,000 per unit to the homebuyers to pay the closing costs.  For
the nine months ended September 30, 2008, the Company’s sales activity resulted
in the execution of sixteen contracts with two cancellations during the
period.  For the same period in 2007, the Company had eighteen new
contracts and six canceled contracts.  The Company continues to
believe that the remaining units in Torres will sell at the current
pricing.
  Management
and Other fees – Puerto Rico Operations:
 Management
fees presented on the consolidated income statements include only the fees
earned from the non-controlled properties; the fees earned from the controlled
properties are eliminated in consolidation.  We recognize monthly fees
from our management of four non-owned apartment properties and three homeowner
associations operating in Parque Escorial.  For the nine and three
months ended September 30, 2008, management and other fees did not differ
substantially from prior period amounts.
 
 General,
Administrative, Selling and Marketing Expenses – Puerto Rico
Operations:
 The costs
associated with the oversight of our operations, accounting, human resources,
office management and technology are included within this
section.  The apartment properties reimburse IGP for certain costs
incurred at IGP’s office that are attributable to the operations of those
properties.  In accordance with EITF 01-14 the costs and reimbursement
of these costs are not included within this section but rather, they are
reflected as separate line items on the consolidated income
statement.  Due to the fact that our corporate office is in our office
building, Escorial Office Building One, rent expense and parking expenses are
eliminated in consolidation.
 For the
nine months ended September 30, 2008, general, administrative, selling and
marketing expenses decreased $321,000 or 14% to $1,928,000 as compared to
$2,249,000 for the same period of 2007.  The decrease is primarily
attributable to a reduction in salaries, bonus, fringe benefits and payroll tax
accruals between periods.  In addition, there were noted decreases in
property and municipal taxes paid in 2008 compared to 2007, a reduction in legal
expenses due to a refund received in 2008 from an insurance company for legal
services paid by the Company during 2007 and a reduction in expenses related to
share appreciation rights as the final outstanding rights were exercised during
the early part of 2008.
 For the
three months ended September 30, 2008, general, administrative, selling and
marketing expenses decreased $146,000 or 18% to $655,000 as compared to $801,000
for the same period of 2007.  The decrease is primarily attributable
to a decrease in stock appreciation rights expense as there were no outstanding
rights during the third quarter 2008.  Additionally, there were
reductions noted in legal expenses as certain legal issues were settled during
the second quarter of 2008, reductions in bonus and related payroll tax accruals
and reductions in property and municipal taxes paid in the third quarter of 2008
compared to the same period of 2007.
  Depreciation
and Amortization Expense – Puerto Rico Operations:
 Depreciation
and amortization expense for the nine months ended September 30, 2008 increased
$70,000 or 3% to $2,827,000 as compared to $2,757,000 for nine months ended
September 30, 2007.  For the three months ended September 30, 2008,
depreciation and amortization expense increased $23,000 or 2% to $944,000 as
compared to $921,000 for the three months ended September 30,
2007.  The increases in depreciation expense for the nine and three
months periods resulted from capital improvements completed in our multifamily
apartment properties.
 
 -28-
 Table of Contents
 Interest
Income – Puerto Rico Operations:
 Interest
income for the nine months ended September 30, 2008 decreased $199,000 to
$29,000 as compared to $228,000 for the same period of 2007.  The
decrease is primarily attributable to the recognition of non-recurring interest
income on the El Monte note receivable in the first quarter of 2007 with no
comparable amounts for nine months ended September 30, 2008.  Interest
income for the three months ended September 30, 2008 increased $10,000 to
$12,000 as compared to $2,000 in the same quarter of 2007.  The
increase for the third quarter is attributable to interest income earned on
certain certificates of deposit, none of which were outstanding for the same
period of 2007.
  Equity
in Earnings from Unconsolidated Entities – Puerto Rico Operations:
 We
account for our limited partner investment in the commercial rental property
owned by ELI and El Monte under the equity method of accounting.  The
earnings from our investment in commercial rental property are reflected within
this section.  The recognition of earnings depends on our investment
basis in the property, and where the partnership is in the earnings
stream.
 For the
nine months ended September 30, 2008, equity in earnings from unconsolidated
entities decreased $1,531,000 to $490,000, as compared to $2,021,000 during the
same period of 2007.  The decrease was related to the payment in full
of the $1,500,000 note receivable held by El Monte in January 2007, with no
comparable amounts received in 2008.  The note was received as part of
the sale of the El Monte facility, at which point the Company determined that
the cost recovery method of accounting was appropriate for gain
recognition.  Accordingly, revenue was deferred until collection of
the note receivable, which occurred in January 2007.
 For the
three months ended September 30, 2008, equity in earnings from unconsolidated
entities decreased $16,000 to $159,000 as compared to $175,000 during the same
period of 2007.
 
 Interest
Expense – Puerto Rico Operations:
 The
Company considers interest expense on all Puerto Rico debt available for
capitalization to the extent of average qualifying assets for the
period.  Interest specific to the construction of qualifying assets is
first considered for capitalization.  To the extent qualifying assets
exceed debt specifically identified a weighted average rate including all other
debt of the Puerto Rico segment is applied.  Any excess interest is
reflected as interest expense.  For 2008 and 2007, the excess interest
primarily relates to the interest incurred on the non-recourse debt from our
investment properties.
 For the
nine months ended September 30, 2008, interest expense decreased $393,000 or 8%
to $4,288,000, as compared to $4,681,000 for the same period of
2007.  For the three months ended September 30, 2008, interest expense
decreased $113,000 or 7% to $1,402,000 as compared to $1,515,000 for the same
period of 2007.  The decrease in interest expense for the nine and
three-month periods is attributable to a decrease in inter-segment interest
expense due to the repayment of an inter-segment note in February 2008 as well
as the normal reduction of interest expense in the mortgages of the apartments
and commercial properties due to the reduction of the outstanding principal
balances.
 For the
nine and three months ended September 30, 2008, $152,000 and $55,000 of interest
cost was capitalized, respectively.  For the nine and three months
ended September 30, 2007, $129,000 and $50,000 of interest cost was capitalized,
respectively.
  -29-
 Table of Contents
 Minority
Interest in Consolidated Entities – Puerto Rico Operations:
 The
Company records minority interest expense related to the minority partners’
share of the consolidated apartment partnerships earnings and distributions to
minority partners in excess of their basis in the consolidated
partnership.  Losses charged to the minority interest are limited to
the minority partners’ basis in the partnership.  Because the minority
interest holders in most of our partnerships have received distributions in
excess of their basis, we anticipate volatility in minority interest
expense.  Although this allows us to recognize 100 percent of the
income of the partnerships up to accumulated distributions and losses in excess
of the minority partners’ basis previously required to be recognized as our
expense, we will be required to expense 100 percent of future distributions to
minority partners and any subsequent losses.
 For the
nine months ended September 30, 2008, minority interest in consolidated entities
decreased $183,000 to $1,235,000, as compared to $1,418,000 for the same period
of 2007.  The decrease was primarily the result of a non-recurring
$400,000 refinancing distribution made to minority partners of one of our
partnerships in the first quarter of 2007.  This decrease was
partially offset by an increase in surplus cash distributions to minority
partners during 2008 as compared to the same period of 2007.  For the
three months ended September 30, 2008, minority interest in consolidated
entities increased $3,000 to $37,000, as compared to $34,000 for the same period
of 2007.
  Provision
for Income Taxes – Puerto Rico Operations:
 The
effective tax rate for the nine and three months ended September 30, 2008 and
2007 were (71%) and 21% and 48% and 31%, respectively.  The statutory
rate is 29%.  The difference in the statutory tax rate and the
effective tax rates for the nine and three months ended September 30, 2008, was
primarily due to tax exempt income offset in part by the double taxation on the
earnings of our wholly owned corporate subsidiary, ICP, and deferred items for
which no current benefit may be recognized.  The difference in the
statutory tax rate and the effective tax rate for the pre-tax income for the
nine and three months ended September 30, 2007, was primarily due to the double
taxation on the earnings of our wholly owned corporate subsidiary,
ICP.  As a result of a non-recurring gain related to its investment in
El Monte, ICP’s current taxes payable and ACPT’s related deferred tax liability
on the ICP undistributed earnings experienced a considerable increase during the
nine month period.
  LIQUIDITY
AND CAPITAL RESOURCES
 
 Summary
of Cash Flows
 As of
September 30, 2008, the Company had cash and cash equivalents of $19,303,000 and
$20,414,000 in restricted cash.  Included in the Company’s cash and
cash equivalents is $8,756,000 of cash located within multifamily apartment
entities, and to which the Company does not have direct control.  The
corporate entity receives surplus cash distributions as well as management fees
from these entities.  As of September 30, 2008, the Company had
corporately available funds of $10,547,000.  The following table sets
forth the changes in the Company's total consolidated cash flows ($ in
thousands):
  Nine
      Months Ended September 30,2008
              
              2007Operating
      Activities
              $
              (6,720
              )
              $
              (6,968
              )Investing
      Activities
              
              (5,906
              )
              
              (7,274
              )Financing
      Activities
              
              7,017
              
              
              5,426Net
      Decrease in Cash
              $
              (5,609
              )
              $
              (8,816
              )
  For the
nine months ended September 30, 2008, operating activities used $6,720,000 of
cash flows compared to $6,968,000 for the nine months ended September 30,
2007.  The $248,000 decrease in cash used in operating activities
between periods was driven by offsetting variances.  Decreases in cash
used in operating activities was primarily driven by a $3,188,000 decrease in
additions to our community development assets.  In addition,
reductions in accounts payables, net of the impact of deferred tax asset
activity, were less for the nine months ended September 30, 2008 as compared to
the same period of 2007.  Partially offsetting this decrease was a
decrease of $1,089,000 in cash collected from receivables and a decrease of
$2,000,000 related to a non-recurring right of way easement payment received
during 2007.  Cash flows were also negatively impacted by a decrease
in home sales activities of $2,637,000 and a decrease in land sales activities,
which were $1,575,000 less between periods.  From period to period,
cash flow from operating activities are also impacted by changes in our net
income, as discussed more fully above under "Results of Operations," as well as
changes in our receivables and payables.
  -30-
 Table of Contents
 For the
nine months ended September 30, 2008, net cash used in investing activities was
$5,906,000 compared to $7,274,000 for the nine months ended September 30,
2007.  Cash provided by or used in investing activities generally
relates to increases in our investment portfolio through acquisition,
development or construction of rental properties and land held for future use,
net of returns on our investments. The $1,368,000 decrease in cash used in
investing activities generally relates to a decrease in capital improvements to
our multifamily apartment properties.  For the nine months ended
September 30, 2008, we made capital improvements totaling $2,561,000 to our
multifamily apartment properties, $3,737,000 less than the same period of
2007.  During the same period of 2007, the Company increased its
investment in capital improvements as a result of the refinancing of several
apartment properties and re-investment of some of those proceeds into the
related projects.  In addition, the increase in restricted cash was
$1,650,000 less for the nine months ended September 30, 2008 as compared to the
same period of 2007.  Partially offsetting these decreases in cash
used in investing activities was a $2,414,000 increase in investments in
construction of new buildings.  The Company is currently constructing
a restaurant/office building within the O’Donnell Lake Restaurant
Park.  In addition, the Company received payment in full for the El
Monte receivable during 2007, with no comparable amounts received during
2008.
 For the
nine months ended September 30, 2008, net cash provided by financing activities
was $7,017,000 as compared to $5,426,000 for the nine months ended September 30,
2007.  The $1,591,000 increase in cash provided by financing
activities was primarily the result of decreases in cash distributions to
minority partners and a $1,548,000 decrease in dividends paid to shareholders, a
result of the suspension of dividend payments in the fourth quarter of
2007.  Decreased cash proceeds from debt financing and decreased
payments of debt between periods resulted in offsetting variances and were due
to the refinancing of the mortgages of two apartment properties, Village Lake
Apartments, LLC and Coachman’s Apartments, LLC during of 2007, with no
comparable refinancings during the first nine months of
2008.  However, the Company received draws from credit facilities of
$4,353,000 related to construction and land development activities.
 
 Contractual
Financial Obligations
 Recourse Debt - U.S.
Operations
 Pursuant
to an agreement reached between ACPT and the Charles County Commissioners in
2002, the Company agreed to accelerate the construction of two major roadway
links to the Charles County (the "County") road system.  As part of
the agreement, the County agreed to issue general obligation public improvement
bonds to finance $20,000,000 of this construction guaranteed by letters of
credit provided by Lennar as part of a residential lot sales contract for 1,950
lots in Fairway Village.  These bonds were issued in three
installments with the final $6,000,000 installment issued in March
2006.  The bonds bear interest rates ranging from 4% to 8%, for a
blended lifetime rate of 5.1%, call for semi-annual interest payments and annual
principal payments and mature in fifteen years.  Under the terms of
bond repayment agreements between the Company and the County, the Company is
obligated to pay interest and principal on the full amount of the bonds; as
such, the Company recorded the full amount of the debt and a receivable from the
County representing the undisbursed bond proceeds to be advanced to the Company
as major infrastructure development within the project occurs.  As of
September 30, 2008, all of the bond proceeds had been used to fund the specified
development.  As part of the agreement, the Company will pay the
County a monthly payment equal to one-sixth of the semi-annual interest payments
and one-twelfth of the annual principal payment due on the Bonds.  The
County also requires ACPT to fund an escrow account from lot sales that will be
used to repay this obligation.
 In August
2005, the Company signed a memorandum of understanding ("MOU") with the Charles
County Commissioners regarding a land donation that is now the site of a minor
league baseball stadium and entertainment complex which opened in May of
2008.  Under the terms of the MOU, the Company donated 42 acres of
land in St. Charles to the County on December 31, 2005.  The Company
also agreed to expedite off-site utilities, storm-water management and road
construction improvements that will serve the entertainment complex and future
portions of St. Charles so that the improvements will be completed concurrently
with the entertainment complex.  The County will be responsible for
infrastructure improvements on the site of the complex.  In return,
the County agreed to issue additional general obligation bonds to finance the
infrastructure improvements.  In March 2006, $4,000,000 of bonds were
issued for this project, with an additional $3,000,000 issued in both March 2007
and March 2008.  These bonds bear interest rates ranging from 4.9% to
5.75%, for a blended lifetime rate of 5.2%, call for semi-annual interest
payments and annual principal payments and mature in fifteen
years.  The terms of the bond repayment agreement are similar to those
noted above.  As of September 30, 2008, $2,162,000 of these bond
proceeds are recorded as a receivable and available to fund the related
infrastructure.  In addition, the County agreed to issue an additional
100 school allocations a year to St. Charles commencing with the issuance of
bonds.
 On April 14, 2006, the Company closed a three
year $14,000,000 revolving acquisition and development line of credit loan (“the
Revolver”) secured by a first lien deed of trust on property located in St.
Charles, MD.  The maximum amount of the loan at any one time is
$14,000,000, bears interest at Prime plus 0.75% (5.75% at September 30, 2008)
and matures on May 1, 2009.  The facility includes various sub-limits
on a revolving basis for amounts to finance apartment project acquisitions and
land development in St. Charles.  The terms require certain financial
covenants to be calculated annually as of December 31, including a tangible net
worth to senior debt ratio for ALD and a minimum net worth test for
ACPT.  As of September 30, 2008 $3,026,000 was outstanding on the
Revolver.
 In December 2006, the Company reached
an agreement with Charles County whereby the Company receives interest payments
on any undistributed bond proceeds held in escrow by the County.  The
agreement covers the period from July 1, 2005, through the last draw made by the
Company.  For the nine and three months ended September 30, 2008 and
2007, the Company recognized $67,000 and $5,000 and $458,000 and $153,000 of
interest income on these escrowed funds, respectively.
 On April
2, 2008, the Company secured a two-year, $3,600,000 construction loan for the
construction of a commercial restaurant/office building within the O’Donnell
Lake Restaurant Park.  The facility is secured by the land along with
any improvements constructed and bears interest at the Wall Street Journal
published Prime Rate (5.0% at September 30, 2008).  At the end of the
two-year construction period, the Company may convert the loan to a 5-year
permanent loan, amortized over a 30-year period at a fixed interest rate to be
determined.  As of September 30, 2008, $2,211,000 was outstanding
under this facility leaving $1,389,000 available to fund completion of the
building.
 
 -31-
 Table of Contents
 Recourse Debt - Puerto Rico
Operations
 Substantially
all of the Company's 490 acres of community development land assets in Parque El
Comandante within the Puerto Rico segment are encumbered by a $10,000,000
recourse revolving line of credit facility.  The homebuilding and land
assets in Parque Escorial are not encumbered by this facility and remain
unencumbered as of September 30, 2008.  The line of credit bears
interest at a fluctuating rate equivalent to the LIBOR Rate plus 225 basis
points (5.038% at September 30, 2008) and matures on August 31,
2009.  The facility is currently being used to fund the development of
infrastructure in Parque Escorial, specifically the development of our Hilltop
project (see “Liquidity Requirements” below), as well as Parque El
Comandante.  The outstanding balance of this facility on September 30,
2008 was
$2,754,000.
 
 Non-Recourse Debt - U.S.
Operations
 As more
fully described in Note 4 to our Consolidated Financial Statements included in
this Form 10-Q, the non-recourse apartment properties' debt is collateralized by
apartment projects.  As of September 30, 2008, approximately 38% of
this debt is secured by the Federal Housing Administration ("FHA") or the
Maryland Housing Fund.  There were no significant changes to our
non-recourse debt obligations for our U.S. operations during the nine months
ended September 30, 2008.
 
 Non-Recourse Debt - Puerto
Rico Operations
 As more
fully described in Note 4 to our Consolidated Financial Statements included in
this Form 10-Q, the non-recourse debt is collateralized by the respective
multifamily apartment project or commercial building.  As of September
30, 2008, approximately 1% of this debt is secured by the Federal Housing
Administration ("FHA").
 On May
12, 2008, IGP agreed to provide a fixed charge and debt service guarantee
related to the Escorial Office Building I, Inc. (“EOB”) mortgage.  The
fixed charge and debt service guarantee requires IGP to contribute capital in
cash in such amounts required to cause EOB to comply with the related financial
covenants.  The guarantee will remain in full force until EOB has
complied with the financial covenants for four consecutive
quarters.  The Company does not expect the funding of this guarantee
to have a material impact on its liquidity and cash flows.  There were
no other significant changes to our non-recourse debt obligations for our Puerto
Rico operations during the nine months ended September 30, 2008.
  Purchase Obligations and
Other Contractual Obligations
 In
addition to our contractual obligations described above, we have other purchase
obligations consisting primarily of contractual commitments for normal operating
expenses at our apartment properties, recurring corporate expenditures including
employment, consulting and compensation agreements and audit fees, non-recurring
corporate expenditures such as improvements at our investment properties, the
construction of the new apartment projects in St. Charles, costs associated with
our land development contracts for the County’s road projects and the
development of our land in the U.S. and Puerto Rico.  Our U.S. and
Puerto Rico land development and construction contracts are subject to increases
in cost of materials and labor and other project overruns.  Our
overall capital requirements will depend upon acquisition opportunities, the
level of improvements on existing properties and the cost of future phases of
residential and commercial land development.
 For the
remainder of 2008 and into 2009, the Company plans to continue its development
activity within the master planned communities in St. Charles and Puerto Rico
and may commit to future contractual obligations at that time.
 As of
September 30, 2008, the Company has $16,238,000 recorded as accrued income tax
liabilities and $3,844,000 as accrued interest on unpaid income tax liabilities
related to uncertain tax positions as required by the provisions of FIN
48.  We are unable to reasonably estimate the ultimate amount or
timing of settlement of these liabilities.
 
 Liquidity
Requirements
 Our
short-term liquidity requirements consist primarily of obligations under capital
and operating leases, normal recurring operating expenses, regular debt service
requirements, investments in community development and certain non-recurring
expenditures.  The Company has historically met its liquidity
requirements from cash flow generated from residential and commercial land
sales, home sales, property management fees, rental property revenue, and
financings.  However, with the current economic environment, there are
no assurances that future sales will occur or that the Company will have
adequate access to credit.
 Pursuant
to agreements with the Charles County Commissioners, the Company is committed to
completing $14,414,000 of infrastructure expected to be funded through
$14,069,000 of County bond proceeds, either by existing bond receivables or
anticipated future issuances.  The Company expects to incur $3,707,000
of this development over the next twelve months, of which $3,025,000 is expected
to be funded by County bond proceeds.  Further, as the Company nears
completion of several significant County Roads Projects, $2,255,000 of retention
and open payables as of September 30, 2008 will be required to be funded, none
of which are eligible for bond funding.  In addition to County
committed development, approximately $7,200,000 of project development is
currently under contract, all of which is expected to be incurred over the next
12 months.  These project costs and the difference between the cost of
County projects and any bond proceeds available to fund related expenditures
will be funded out of cash flow and/or our $14,000,000 revolving credit facility
or working capital.  On
October 20, 2008, the Company received $3,546,000 from its revolving acquisition
and development line of credit.  With this draw, the Company has
$6,572,000 outstanding on this facility.
 On July
22, 2008, the Company signed a construction contract for $5,960,000 of site
development related to the infrastructure of Hilltop phase I site development
for future construction of 220 condominium units in Parque
Escorial.  This work is currently in process and as of September 30,
2008, Puerto Rico planning and development activities had a remaining commitment
of $4,430,000, of which all of this amount is expected to be incurred over the
next twelve months.  Our $10,000,000 credit facility will be used to
fund these expenditures.  Further, we may seek additional development
loans and permanent mortgages for continued development and expansion of other
parts of St. Charles and Parque Escorial, potential opportunities in Florida and
other potential rental property opportunities.
  -32-
 Table of Contents
 On June
24, 2008 the Company and Cynthia L. Hedrick, Executive Vice President and Chief
Financial Officer, entered into a separation agreement requiring the Company to
pay Ms. Hedrick a $600,000 severance payment.  In response to new
federal tax regulations, the Company deposited the severance payment into a
trust account to be disbursed to Ms. Hedrick on February 15, 2009, subject to
the terms of a Rabbi Trust Agreement.  The severance deposit was
presented on the balance sheet as restricted cash as of September 30,
2008.
 On
October 1, 2008, Mr. Edwin L. Kelly notified the Company that he will retire as
the Company’s President and Chief Operating Officer effective December 1,
2008.  Through December 1, 2008, Mr. Kelly will continue to be
compensated in accordance with the terms of the Executive Retention Agreement
between him and the Company, dated as of July 1, 2007.  Pursuant to
the agreement, Mr. Kelly will receive a severance payment equal to 36 months of
his base salary, approximately $1,500,000.  The severance payment will
be dispursed to Mr. Kelly on December 1, 2008.  The Company has
also agreed to enter into a consulting agreement with Mr. Kelly providing
compensation for his services at a rate of $10,000 per month, for an initial
term of one year.
  Management
has noted a current reduction in the demand for residential real estate in the
St. Charles and Parque Escorial markets.  Should this reduced demand
result in a significant decline in the prices of real estate in the St. Charles
and Parque Escorial markets or defaults on our sales contracts, it could
adversely impact our cash flows.  Although Lennar is contractually
obligated to take 200 lots per year, the market is not currently sufficient to
absorb this sales pace.  Lennar has completed the terms of the
December Amendment and, accordingly, the terms of the original agreements are
currently in place.  However, we are in the process of negotiating
another modification request from Lennar.  The modification will
likely require additional lots to be taken down in the fourth quarter, provide
pricing concessions similar to those in the December 2007 agreement and provide
that Lennar purchase the Company’s equity interest in the Heritage Active Adult
Joint Venture.  Management has also noted a current reduction in the
demand for commercial properties.  Sustained reductions in demand for
our commercial property would adversely impact our cash flows.
 As a
result of our existing commitments and the downturn in the residential real
estate market, management expects to use its resources conservatively in 2008
and 2009.  As such, the Board of Trustees elected not to award 2007
bonuses to executive management or declare a dividend to our shareholders for
the first and second quarters of 2008.  Anticipated cash flow from
operations, existing loans, refinanced or extended loans, asset loans, and new
financing are expected to meet our financial commitments for the next 12
months.  However, there are no assurances that these funds will be
generated.
 The
Company will evaluate and determine on a continuing basis, depending upon market
conditions and the outcome of events described under the section titled
"Forward-Looking Statements," the most efficient use of the Company's capital,
including acquisitions and dispositions, purchasing, refinancing, exchanging or
retiring certain of the Company's outstanding debt obligations, distributions to
shareholders and its existing contractual obligations.
 
 ITEM
      4T.
              CONTROLS AND
PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 As noted
in our prior quarter Form 10-Q, the Company reported a significant deficiency
that resulted in the conclusion that the Company’s disclosure controls and
procedures were not effective.  Since that time, the Company has been
taking steps to begin remediation of the significant deficiency.  The
Company has appointed a new CEO and CFO in accordance with appropriate policies
and has worked to improve communication between senior management and the
Board of Trustees.  In addition, the Company is working to further
clarify its Delegation of Authority policy as part of the implementation of the
recommended controls and procedures noted in the June 30, 2008 Form
10-Q.  As part of this process, no new matters have come to our
attention that would require additional remediation and we believe that
remediation will be completed during the fourth quarter of 2008.
 In
connection with the preparation of this Form 10-Q, as of September 30, 2008, an
evaluation was performed of the design and operation of our disclosure controls
and procedures as defined in Rule 13a-15(e) under the Exchange
Act.  In performing this evaluation, management reviewed the
selection, application and monitoring of our historical accounting policies.
Based on that evaluation, the CEO and CFO concluded that, as of September 30,
2008, these disclosure controls and procedures were not effective to ensure that
the information required to be disclosed in our reports filed with the SEC is
recorded, processed, summarized and reported on a timely basis.
 Changes
in Internal Control Over Financial Reporting
 The
Company’s management, with the participation of the Company’s CEO and CFO,
evaluated any change in the Company’s internal control over financial reporting
that occurred during the quarter covered by this report and determined that
there was no change in the Company’s internal control over financial reporting
during the quarter covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
 -33-
 Table of Contents
 PART
      II
              OTHER
      INFORMATION
 
 ITEM
      1.
              LEGAL
  PROCEEDINGS
 
 See the
information under the heading "Legal Matters" in Note 5 to the consolidated
financial statements in this Form 10-Q for information regarding legal
proceedings, which information is incorporated by reference in this Item
1.
 
 ITEM
      1A.
              RISK
FACTORS
 
 There has
been no material change in the Company’s risk factors from those outlined in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.
 
 ITEM
      2.
              UNREGISTERED SALES OF EQUITY SECURITIES AND
      USE OF PROCEEDS
 
 None.
 
 ITEM
      3.
              DEFAULTS UPON SENIOR
  SECURITIES
 
 None.
 
 ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 None.
 
 ITEM
      5.
              OTHER
  INFORMATION
 
 None.
 
 ITEM
      6.
              EXHIBITS
 
 (A)
              Exhibits10.1
              Employment Agreement, dated September 26, 2008, between
      the Company and Steve Griessel31.1
              Rule 13a-14(a)/15d-14(a) Certification of Chairman and
      Chief Executive Officer31.2
              Rule 13a-14(a)/15d-14(a) Certification of Chief
      Financial Officer32.1
              Section 1350 Certification of Chairman and Chief
      Executive Officer32.2
              Section 1350 Certification of Chief Financial
      Officer
 
  -34-
 Table of Contents
  SIGNATURES
 
 
 Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
 
 AMERICAN COMMUNITY PROPERTIES
      TRUST(Registrant)Dated:  November
      12, 2008
              By:
              /s/
      J. Michael WilsonJ.
      Michael Wilson
                ChairmanDated:  November
      12, 2008
              By:
              /s/
      Stephen GriesselStephen
      Griessel
                Chief
      Executive OfficerDated:  November
      12, 2008
              By:
              /s/
      Matthew M. MartinMatthew
      M. Martin
                Chief
      Financial Officer
 
  -35-